How to tell the difference between the good debt and bad debt

„All debt is bad“ this is one of the most common missconceptions in financial world. Starting an untested business with a loan, accumulating credit card debt, not paying off your debt and getting penalized with default interest rates and other mistakes can destroy your savings and prospects of a bright future. There is a simple rule of thumb what’s bad debt and what’s good debt. Some debt is helpful, most of it isn’t, make sure you know the difference between the two.

Do not acquire bad debt


What is a bad debt? Every time you take an debt at a higher interest rate than the expected return from the debt it’s bad debt. Stay away from things that are unlikely to retain their value.
For example if you buy low yielding goverment bonds with an interest rate of 2% but you are acquiring it with loan that has an interest rate of 3% or more. You’re getting a bad debt. Same goes for getting in debt when you are buying clothes, starting an untested business, cell phones, cars or anything other that declines in value over time. Buy assets and things that improve your net worth or things that can help you generate a higher income.
Why clothes? Because you can’t resell them for higher value. Why cell phones? You bought it today for $600 in six months you will be able to resell it for $400 at best. Why cars? You bought it today at $100.000 the minute you drove it home it’s value is $90.000 or less.

Acquire good debt

Good debt comes in two forms.
First is when you invest your money in your growing business, invest it by buying stocks, shares or any other investment. To help you choose a winning stock or share you can check the article about picking a perfect penny stock, same rules apply to regular stocks. In the introduction I said don’t start business with a loan but you can use debt to scale your business.

Second  is when you use your good debt to get rid of the bad debt by doing debt consolidation. Good debt is here to help you increase your earnings or decrease your losses. Always try to finance your endeavors from your savings first, resort to debt as a last case scenario.

If it’s not making you money, don’t spend your money on it.