How to Manage your Finances Good Debt vs Bad Debt

For some people managing finances come naturally, but for others it is a bit of a learning curve and takes a little work.

Gaining a firm understanding of how to properly manage personal finances is good effort for anyone to invest in. Having the ability to manage finances and possess the ability to not only recognize the differences between good debt and bad debt, but inherently balance, the two can help pave the way to a successful financial future.

* Managing Good Debt

Fundamentally good debt has a strong potential to increase your overall wealth and establishes a starting point that can lead to future financial health.

This does not mean that carrying consistent good debt is necessarily going to lead to a healthy financial future, what it means is there is potential to create additional wealth. Liabilities that fall under the good debt category are those debts such as mortgage, real estate, education and certain investments – these are considered to be good assets to possess.

However prior to taking on this type of debt, the property or other investment should be carefully researched, risks identified and feasibility considered. If the debt is too heavy to carry, this is only going to lead to foreclosure or bankruptcy.

* Managing Bad Debt

On the other hand, bad debt not only offers no real tangible long-term value, but can also lead to higher monetary liabilities that can lead to problematic personal finances. Bad debt contributes to a heavy financial burden that could be difficult to emerge from; it also offers no long term benefits.

Examples of bad debt are high credit card bills, retail store credit bills and auto loans. While theoretically cars can be considered as an asset, the truth is that most cars significantly depreciate the moment they are driven off the dealer lot.

To avoid accumulating too much bad debt, it is a good idea to carefully consider the purchases made. Ask yourself questions such as “Will this item have any resale value?” Or better yet, “Do I need this purchase”. Wherever possible, a general good rule of thumb is to operate on the cash rule. If you cannot pay for a purchase in cash with the income earned in the same month, then if it is not a necessity, you should not buy it.

One of the issues that perhaps contributes to high debt in today’s society is that a false impression exists that one needs to continuously carry debt in order to maintain good credit. While perhaps this may or may not have been true at one time, in today’s society, carrying consistent debt does not necessarily equate to good credit ratings. It is perfectly possible to establish good credit and then live a debt-free lifestyle.

Another problematic issue is the fact that today’s world operates on philosophies rooted in convenience and instant gratification. Those who can avoid falling into these two habits often find they have a much better time managing their debt and keeping to a healthy financial path.