Traditionally, there are good debts and bad debts. Personal finance advisers and bloggers have created the labels to justify their own thinking and put our minds at ease. The personal finance world has come up with reasons why. But what’s the biggest difference between the two?
Whether or not a debt is good or bad depends on your situation. A good debt for you might be a bad debt for someone else.
This is a general way to think about your personal finances. When you’re thinking about yourself, understand your situation is unique. You may be walking in someone else’s footsteps at the moment, but you’ll have to forge your own path soon enough.
The biggest difference between good debt and bad debt is your personal situation.
Don’t let a good label put your mind at ease and don’t let a bad label get you in a tizzy.
For example, student loans are traditionally considered a good debt. If you read anything on the internet, they’ll give you reasons why student loans are good debt. However, here’s what those articles didn’t do. They didn’t consider your personal situation when they labeled student loans as good debt.
Avoid being over influenced by labels. Just because someone labels a student loan as good debt doesn’t mean the debt is good for YOU. It might be, but it might not.The biggest difference between good debt and bad debt is your unique personal situation. Click To Tweet
Student loans can transform into bad debt depending on your situation.
Let’s come up with an example. Imagine you’re planning a career shift which will significantly reduce your pay. You’ve reached a turning point in your life and you’ve found your next passion.
When you finished college and started your career, your annual salary was a great return on your student loan investment. Your investment in college continued to pay off with annual salary increases for a decade. However, even with ten years of employment, you weren’t able to pay off your student loans.
Related Reading: Pay Off Your Debt by learning from others writing about it.
Your once good debt student loans are quickly turning into bad debt. With your new gig, you will have to delay or refinance student loan payments to be able to afford monthly expenses with your new salary.
Mortgages can become bad debt in retirement.
In a slightly different sense, mortgages are also considered good debt. You take on a significant amount of debt for an asset which is relatively stable. In most scenarios, you can expect your house value to retain most of its value or slightly increase over the lifetime of the loan.
If you’re someone nearing retirement, a large mortgage can turn into bad debt. Many people in retirement can’t afford or don’t want to have a mortgage payment (and rightfully so). Financial advisers often recommend paying off mortgages before retirement.
If credit card debt keeps you afloat, it might be a good thing.
Student loans and mortgages aren’t controversial. People generally agree, for the most part, student loans and mortgages are good debt. Student loans can allow you to achieve huge returns in salary over the years. Compared to buying a new car, a mortgage tends to retain its value over the years.
I must warn you, this next statement will sound like blasphemy. Credit card debt can be a good thing in specific situations. It’s not always bad.
Are the interest rates killer? Yes. However, if you’re left with no other options, credit card debt can keep you afloat.
In terms of return on investment, credit card debt is almost never good, but don’t be fooled. There are other ways to measure return on investment.
- Does the debt allow your family to keep the house?
- Are you staying healthy and eating right?
- Do you still perform adequately at work?
- Are you staying current on all of your bills?
Don’t get me wrong. Credit card debt is stressful and most of us would choose to avoid it. That part is almost never good. Looking at the debt another way, you can start to feel a little bit better about it.
Losing your house would be a disaster. Turning your life upside down would likely lead to poor performance at work. Falling behind on your other bills would turn good mortgage debt into bad mortgage debt.
If credit card debt allows you to keep other aspects of your life on track, it’s good debt. It’s good debt you’ll need to address when you get back on your feet, but it’s still good debt. You’ve been able to use credit card debt to keep your family from drowning.
Be careful of how you let others define your life. If credit card debt allows you to keep your life together for a few months, don’t let others say that’s a bad thing. Your situation is unique.
If paying off your student loans early is something that makes you happy, don’t let others tell you its the wrong decision. Others may view their student debt as a good thing, but you might see the debt as bad for your future.
Remember your life is a unique set of experiences and knowledge built over time. You may be following in the footsteps of others, but you’ll veer off to a new path at some point. Much like I sold my old car for $100 to save money, you’ll make decisions others will find stupid.
Don’t worry. When it comes to your debt, make your own labels. If you think student loans are bad debt, treat them as such and pay them off early. If you hate the idea of having a mortgage for 30 years, make extra payments and pay that shit off early.
The biggest difference between good debt and bad debt is your personal situation. Remember that.
[Featured Image Credit: Kacper Szczechla]