Debt isn't automatically bad. But the wrong kind of debt, or too much of any kind, can derail your finances.
The Debt Spectrum
"Good" Debt
Debt that typically:
- Has low interest rates
- Finances assets that grow in value or increase your earning power
- Is tax-
| Type | Why It Can Be "Good" |
|---|---|
| Builds equity, often appreciates, tax-deductible | |
| Student loans | Increases earning potential (ideally) |
| Business loan | Invests in income-generating asset |
"Bad" Debt
Debt that typically:
- Has high interest rates
- Finances things that lose value
- Keeps you trapped in payments
| Type | Why It's Risky |
|---|---|
| debt | 15-30% , compounds against you |
| Payday loans | 400%+ APR, debt spiral trap |
| Car loans (excessive) | Depreciating asset, often underwater |
Watch Out
"Good" debt can become bad debt if you borrow too much. A $200k mortgage might be fine; a $600k mortgage on the same salary is dangerous.
The True Cost of Debt
Every dollar you pay in is a dollar that could be building your wealth.
Example: $5,000 credit card balance at 20% APR, minimum payments:
- Time to pay off: 20+ years
- Total paid: $12,000+
- Interest paid: $7,000+
You pay back more than double what you borrowed.
When Borrowing Makes Sense
Do This
Consider borrowing when:
- is below 6-7%
- It builds equity or earning power
- You have a clear payoff plan
- You'd lose more by waiting (missing a career opportunity, emergency)
Avoid This
Don't borrow for:
- Vacations
- Weddings you can't afford
- Cars beyond your means
- Lifestyle you haven't earned yet
The Debt Question to Always Ask
Before taking on any debt, ask:
"Will this purchase be worth more or less than what I'll pay (including interest)?"
- House: Probably worth more → Could be okay
- Education: Higher income potential → Depends on the degree and cost
- New TV on credit card: Worth less → Bad idea
Quick Win
List all your current debts with their interest rates. Anything above 10%? That's priority #1 to pay off.