You can cut all the flowers,
but you cannot keep Spring from coming.
– Pablo Neruda
What’s the Difference Between Good and Bad Debt?
Debt can become a millstone around your neck if you let it, but it can also be a positive factor in your financial life if you know how to use it and what to use it on. Certain debts are better to keep around than others, and using debt strategically can actually help you in the long run.
The main way to check how your debt is working for you is to examine the relationship between money and time. For example, student loans allow you to avoid paying a cost upfront in exchange for a higher cost later, but that higher cost will (hopefully) be met with a higher income on your part. In theory, the same goes for having a mortgage. If your future salary will be able to cut the time you need to pay off the mortgage by half, then it’s better to reap the rewards upfront.
Student loans: If 10% of your income for 10 years will pay off your total loan amount, you’re in a good place. If it would take more than 10%, the debt becomes bad.
Mortgages: mortgages are almost always good debt to have around, because they’re relatively inexpensive.
Car Loans: Car loans are often considered to be bad debt because of their typically high interest rates.
Credit Cards: Credit card debt is almost always bad debt, but it can be manageable until your interest payments start to approach the amount of money you’re able to put into them each month. As long as you avoid that tipping point, your credit debt can work for you.