Does Yesterday’s Advice Ring True Today?
When you were growing up, you may have heard your parents or grandparents say, “If you can’t pay for it with cash, then you can’t afford to buy it.” That sound advice worked then, but does it still ring true today? The average cost of a car, house, or college education has skyrocketed when compared to the average household income. Typical families now have legitimate needs to borrow money if they want to buy a home, drive a car, or educate themselves or their children. Throw in a handful of credit cards, and it is no wonder the average consumer is carrying more debt than ever before. With greater credit needs comes a greater need for debt management.
Good debt management ensures that you will have credit when you need it, make wise borrowing decisions, and avoid disaster if you become overextended. You can ensure that loans are available when you need them by establishing and maintaining a positive credit record. You can benefit from many specialized loan programs if you are aware of your borrowing options. You can save money by taking steps to reduce the cost of debt and save yourself from disaster if you know what to do when you can no longer meet your financial obligations.
Having a never-ending supply of cash may be a dream. Many would love to do whatever they want when they want. It is far better than the alternative–incurring debt. In order to pursue true wealth, you need to understand the difference between “good” and “bad” debt. So how can you tell “good debt” from “bad debt”?
Here are the working definitions of what I am talking about:
Good debt: Good debt involves purchasing something that will gain, retain, or create value. A home mortgage is a prime example of good debt.
Bad debt: To put it simply, bad debt is any debt you incur when buying something that will lose value.
Ugly debt: Ugly debt is debt incurred when purchasing something consumable (meaning it will have no further value). This seems logical, right?
A Driving Factor
Many people assume bad debts because “that’s just how it is.” But that’s not necessarily how it has to be. For example, look at vehicles. Many Americans buy cars via automobile loans. But a new or late-model car loses value the moment you drive it off the lot, and it continues to lose value with every mile it travels. So why incur bad debt for this? Well, for many a vehicle is simply a necessity and a loan is the only means they have available to obtain it. But a large percentage of Americans purchase more car than they really need or can afford. It’s important when facing bad debt to keep that debt in check. Purchase only what you need, and with a plan to pay it off as quickly as you can.
Can bad debt turn into good debt? Yes! Let’s say you purchase a vehicle by taking out a loan for a portion of the cost–that’s bad debt. But if the vehicle is a hybrid or electric vehicle that typically has a high resale value and saves you a substantial amount of money on gasoline, your bad debt could turn into good debt.