An Introduction to good debt vs bad debt
There's a lot of debate out there about whether debt is good or bad. The truth is it depends on the type of debt you're taking on. Some types of debt can help you reach your financial goals, while others can set you back.
Good debt is typically associated with investments that will grow in value over time, such as a mortgage or student loan. This type of debt can help you build long-term wealth. Bad debt, on the other hand, is typically associated with purchases that depreciate, such as a car loan or credit card debt.
This type of debt can put a strain on your finances and make it difficult to reach your financial goals. If you're considering taking on any type of debt, it's important to understand the difference between good and bad debt.
Why do people go into debt?
There are several reasons why people go into debt. Some people use debt to finance a large purchase, such as a home or car. Others use it to cover unexpected expenses, such as medical bills or home repairs. Whatever the reason, it's important to understand that not all debt is created equal.
Is it better to have good debt or no debt?
The answer to this question depends on a few factors, including your financial goals and the type of debt you're taking on. If you're taking on good debt that will help you reach your financial goals, then it's probably a good idea.
However, if you're taking on bad debt that will put a strain on your finances and become a burden, then it's probably not a good idea. Ideally, you will want to have no debt at all because being liable to pay something back can go wrong if you are not financially responsible and stay on top of your payments. There are some types of debts that can be unavoidable based on your goals.
How much debt is normal?
There's no right or wrong answer to this question. It depends on your personal circumstances and financial goals. If you're trying to pay off debt as quickly as possible, then you might want to keep your debt-to-income ratio low.
This means that your monthly debt payments should be less than 36% of your monthly income. However, if you're comfortable with a higher debt-to-income ratio, then you might be able to take on more debt.
At what age should you be debt free?
Again, there's no right or wrong answer. It depends on your personal circumstances and financial goals. Some people feel comfortable carrying debt into retirement, while others want to be debt-free by a certain age. So, it's important to figure out what works best for you and your specific situation.
What are some examples of good debt?
- Mortgage debt is typically considered good debt because it's used to finance a home, which is an asset that usually increases in value over time.
- Student loan debt is used to finance your education, which can lead to a higher income and more job opportunities.
- Business debt can be viewed as good debt if it's used to finance a business that is growing and generating income. Very few people have the available capital to fully fund a business start-up. Using money to make money or “earning money takes money” applies to business, especially if it is a physical business versus an online venture. Permits, licenses, hiring, legal, property, etc. – the list is long and could require debt. A solid business plan will help to mitigate any risk and may help see profits on the borrowing sooner rather than later.
What are some examples of bad debt?
- Credit card debt is typically considered bad debt because it's used to finance purchases that depreciate, such as clothing, electronics, and vacations. Credit card debt can also come with higher interest rates.
- Car loan debt is often used to purchase cars that depreciate as soon as they're driven off the lot. Having a higher down payment or buying a used car can greatly lessen your monthly payments for a vehicle.
- Personal loan debt can be considered bad debt if it's used to finance a luxury item, such as a boat or a second home. It can also be considered good debt if it's used to consolidate other debts and reduce your monthly payments.
How can you pay off your debt?
If you're struggling to pay off your debt, there are a few things you can do:
- Negotiate with creditors to lower interest rates or monthly payments.
- Consolidate your debt into 1 payment.
- Increase your income by taking on extra work/hours.
- Make changes to your lifestyle.
- Consult with a credit counselling professional to establish a plan that works for you.
Credit counselling services in Canada
If you're struggling to pay off your debt, you can get help from a credit counselling service. Credit counselling services are non-profit organizations that can help you develop a budget and create a debt repayment plan.
They can also negotiate with your creditors on your behalf to try and reduce your interest rates or monthly payments. Canada Life has relationships with credit counselling associations that give our group plan members free access to their services for help with budgeting, credit, and debt management.
If you're a Canada Life group plan member, check out our credit counselling resources and how they can help you. Also, you can brush up on different ways to improve your financial well-being.
In conclusion, it's important to understand the difference between good and bad debt. Good debt can be used to finance purchases that appreciate, such as a home or an education. Bad debt is used to finance purchases that depreciate, such as clothing or vacations.
If you're struggling to pay off your debt, there are a few things you can do, including consolidating your debt into one payment or increasing your income. Understanding good debt vs bad debt can help you make financial decisions that are right for you.