What can be Defined as Good Debt

So many people are caught in the debt trap these days that many now aspire to be debt free.  There is such a thing as good debt though, strange as that may sound, and it is when debt is used to purchase something which will have a positive financial affect on one’s future.

Anyone with a mortgage on their home is in debt, and this can be a terrible thing for someone who is overextended and bought beyond their means, having to have the best, rather than the best they could afford. For the average householder with a mortgage though there is a fixed date the debt should end, it should be an affordable debt.  At the term end the property is paid for in full and you have the freedom of never paying rent again, plus an asset with equity in it. Thus the debt which was used to finance the property, the mortgage, was a good debt.

Over time the price of property invariably rises so at the end of the day the house you purchased will have grown in value. However one shouldn’t fall into the habit of taking equity from the property just because it is there, to finance something else, as this then equates to increasing your monthly debt, and thus interest, to the mortgage company. Always try to retain the equity in your property and see it as something solid. Your mortgage debt is an investment for your future.

The other type of good debt is that such as a student loan, if it is taken on with an end in sight, to enhance your credentials in the future work place. If there is no real end in sight, just education for educations sake, one would be better remaining debt free and learning whilst one works, as education  is indeed a costly business. If it is seen as an investment in your personal future then the debt could be worth while, as you will be financing yourself as a means of securing a better future.

People justify other debts such as the purchase of a new car, by saying it is necessary, but any debt which is used to purchase something which depreciates in value is not a good debt. You may feel superior driving a brand new car from the fore court but you aren’t as smart as the person leaving with a lower debt and a car which will depreciate less in value. Similarly anything which goes on credit now for instant gratification is not good debt, whereas if you were to incur a small debt to install solar into your home in expectation of future reduced electric costs, then you have taken on good debt, as the debt will start to pay for itself.

If you are considering taking on a new debt, ask yourself if is really worth it. Is there some long term benefit from it, will it pay itself back? If the answer is yes, then you are looking at debt in a positive way, and understanding that today’s debt will be tomorrow’s profit.