by Shai Angel
“Debt” typically has a negative, ominous connotation. Our parents have instilled in us since we were young children, the belief that debt is something you should always try to avoid. However, given how terrible it is to take on debt, why do the majority of the richest people in the world do so? How did they manage to take on debt and make it work in their favor? Yes, there are undoubtedly bad debts, but there are also good debts. I’ll highlight the two in this article, along with some advice on avoiding taking on bad debt.
Good Debt
- Investment in Assets
Borrowing for investments having the potential to appreciate in value over time is frequently linked to good debt. Examples include:
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- Mortgages – borrowing to purchase a property that might increase in value.
- Student Loans – putting money into education in order to increase earning potential.
- Low Interest rate
Interest-rate-low debt is typically viewed as preferable. One could argue that a home or student loan with a comparatively low interest rate are examples of positive debt.
- Positive returns
Debt that enables you to earn revenue or favorable returns is regarded favorably. For example, taking out a loan to launch a profitable business venture.
- Tax deductibility
Certain debts could provide tax benefits. For instance, mortgage interest is frequently tax deductible
Bad Debt
- High Interest consumer debt
High-interest consumer debt used for non-essential, depreciating products is frequently linked to bad debt. Examples include:
- Credit card debt Building up high-interest debt to pay for luxuries
- Payday Loans – Short-term, high-interest loans that are frequently used for urgent financial demands.
- Non-Essential purchases
Bad debt may be incurred while financing luxury or non-essential things, particularly if the commodities do not retain or appreciate in value.
- Impulse Spending
Bad debt is a term used to describe debt that results from careless or reckless expenditure. It frequently indicates a lack of sound money management.
- High risk Investments
Bad debt may result from taking out a loan to fund high-risk endeavors without a clear plan of action or a guarantee of profit.
It’s critical to understand that determining whether debt is “good” or “bad” can be arbitrary and situation specific. A wise financial choice for one individual could not be the same for another. Furthermore, the key frequently lies in how the borrowed money is used and whether or not the debt fits with a person’s overall financial objectives and ability to make repayments. It’s wise to thoroughly consider the goals, conditions, and possible repercussions of taking on any debt. Getting guidance from financial experts can also assist people in making decisions that are well-informed for their particular situation.
Shai Angel, CPA, earned a master’s degree in law, a bachelor’s degree in accounting and economics, and a certificate in director training. He has previously held senior financial positions in well-known businesses. In his years of working in the financial industry, he has actively learned about “Value Investing” from some of the most prominent investors in the world, including Warren Buffett, Peter Lynch, Mohnish Fabray, and others, and also applied their investment strategies. (Shai Angel Linkedin)
