For most of us living a life without debt is almost impossible. Whether it is credit cards, student loans, or a mortgage, debt is just a part of life.
Nobody actually likes being in debt, but sometimes it is a smart move.
Certainly when it comes to investing in your education, or future ability to earn more money, debt can be very sensible. As it is with buying a house.
But what makes some debt good debt
A simple way to explain it is that it makes sense to borrow to buy an asset which will go up in value. Bad debt therefore is borrowing for anything which will decrease in value.
Good debt funds investments, or assets, that we otherwise could not afford to buy. It helps by creating leverage to purchase assets or investments that will help you become wealthier over time. Having said all that, it is worth investigating one type of debt a little further:
Research shows higher education leads to higher incomes, and degrees definitely add income for many. That in turn provides you with the chance to save and invest more than the average person, and increase wealth.
The problem is, there are many degrees and a lot of higher education provided today which does not lead to higher earnings. Some degrees just do not pay off by leading to better income earning jobs.
When it's good: If you have a clear career path with the potential to earn a lot of money and need to finance your higher education with loans. Just be sure to borrow only what you need and continue to save.
When it's bad: If your chosen career path will not generate significant income and you need to take out a bunch of loans to pay for your education.
- Last updated on .