Is there such a thing as good debt? Of course, there is! Here’s the truth. All debts are not bad. It has a purpose and can be used to improve your financial situation. The only way that it gives us a bad experience is because we don’t use it properly. We tend to abuse it because it’s very convenient to use. When we are buried under a huge amount of debt, we feel like it’s the fault of debt. But in truth, we are to blame for our debt situation.
It’s easy to be careless with the way we use debt. It’s very convenient and accessible. And if we end up having a lot of debts, it becomes harder to pay off. It gets worse when something bad happens and we are left unable to pay off our debts.
This is the predicament of a lot of people right now. Reports revealed that 2019 saw the highest annual increase in credit. Now when 2020 came in and it brought the health crisis and the recession with it, people started to worry about how they will pay off their debts. Unemployment is still getting worse and the recession is in full swing. How can we survive with all the debts we have?
You need to pay off your debts. But whatever the bad debts destroyed can be rebuilt. You can get back what you lost and you can use good debts to make your finances stronger.
What is considered a good debt
First, let’s understand what is considered good debt. This is any type of debt that can be used to improve your net worth or increase your monthly cash flow.
There are many types of good debts but here are the three most popular ones.
It’s always a good idea to invest in your first house. After all, shelter is a basic necessity. Even if you run out of money to pay for everything else, you’ll still feel secure as long as you have a roof over your head. This is why it’s everyone’s dream to become a homeowner. They know that no matter what happens, they are protected in their home. Even if it’s not completely paid, every payment they send towards it will become a part of their growing equity. They get to own it.
But that’s not the only reason why mortgages are considered as good debts. The value of the property will go up over time. The land value alone appreciates. Every time you renovate or make improvements in your house, it will add to the value. In case you decide to sell it someday, you’ll be able to sell it for a bigger amount than what you paid for. That’s how this good debt can help rebuild your finances. The fact that this has one of the lowest interest rates among different types of debt is just icing on the cake.
Another debt that is good for you is student loans. This type of debt is used so you can get the education you need to pursue your career. It makes you qualified to receive a higher salary range. You can borrow from the government or private lenders. If you borrow from the former, you will get the lowest interest rate for the debt.
Some might say that student loans are probably better than mortgage loans. If you can’t pay off your mortgage, your house will be in danger of being taken from you. It will be foreclosed. But if you can’t pay your student loans, they can’t take your knowledge from you – can they? Of course, student loans cannot be discharged through bankruptcy, so chances are, you will be paying it off. However, the higher salary that you will qualify for should give you what you need to meet your monthly payments. Not only that but there are several repayment programs that you can use to make the payments more affordable.
The last of the good debts that you can use to improve your finances are business loans. There are so many options to do this. From startup loans to personal loans – you can use these to start your dream business
Having your own business will be hard. It can also be risky. But if you choose a business that you are passionate about, you can overcome any struggles. And the good thing about it is, if you work hard enough, you can increase your net worth significantly. Even if you borrowed money to start everything, you can pay it off.
Of course, it has to be clear that the good debt we are discussing here involves a business loan and not a credit card. While there are advantages and disadvantages of using business credit cards it can easily be abused. Make sure the use of credit will be controlled in case you decide to use it for company-related expenses.
Two ways good debt can benefit your finances
Why should you be so concerned about using good debt? Because if you know how to use this properly, it can bring two significant benefits to your finances.
It can grow your net worth
This is mostly referring to the mortgage. When you buy a house, it has the potential to increase your net worth. This is true even if you bought that using debt and you have to pay interest on that mortgage.
How does it increase your net worth?
Any property increases in value over time. This is known as the concept of appreciation. It is especially applicable to properties that are standing on land. You see, land cannot multiply. So as the population increases, it becomes more scarce. When something is limited the value increases. That’s the law of scarcity. This is why land is expected to appreciate no matter how the market performs. This is why the property or house that you will buy now will have a higher value in 10 years.
You may be thinking – if you use a mortgage to help buy the house, won’t you be at a disadvantage? In the beginning, you will be. But as you continue to make payments, it will all go to the equity of the house. That means every payment increase the value of the property that you own. As long as you continue paying, you will soon completely own it. And that means your net worth just went up.
It can increase your income potential
The second benefit of using a good debt is to increase your income potential. This applies to student loans and business loans. Both of these debts can help you increase your income.
A student loan will give you the skills and knowledge you need to earn a higher income. According to statistics, graduates with a bachelor’s degree are eligible to earn 66% more than those who only completed their education at a trade school. So if you complete a higher education, you can demand more income from your future employer. Even if you used student loans to pay it off, you should earn more than enough to help you pay the monthly dues.
The same is true for business loans. It will help you capitalized on your business idea that will hopefully help you earn enough revenue to pay back your loan. That way, all the profit earned by the company can be invested further to grow the business. Or it can be used to increase your net worth even further. At least, that can help rebuild anything that bad debt has destroyed from your finances.