There's a case to be made that having no debt is preferable to having a lot of debt. Many people, however, can only afford to buy critical big-ticket items like a home by borrowing money and taking on debt. While such types of loans are normally justifiable and give value to the borrower, there is another end of the spectrum when debt is taken on irresponsibly. While distinguishing between these two extremes is simple, judging other debts is more difficult.
Let us first try to understand what is good debt.
The classic saying "it takes money to produce money" is often represented by good debt. If the debt you take on helps you earn money and increase your net worth, it's a win-win situation. Debt that enhances your and your family's lives in other major ways is also acceptable.
How can good debt help? Let us take a few examples to understand that.
Education
In general, the higher one's educational attainment, the higher one's earning potential. Education also has a favourable impact on one's capacity to find work. Workers with a higher level of education are more likely to be employed in well-paying positions and have an easier time finding new ones if the need arises.
Within a few years of entering the workforce, a college or technical degree can often pay for itself. However, not all degrees are created equal, so it's important to think about the short- and long-term implications of any topic of study that interests you.
Money for your business growth
Borrowing money to establish your own business falls under the category of good debt. It is typically both financially and psychologically satisfying to be your employer. It can also be extremely taxing.
Starting a business, like paying for education, has risks. Many businesses fail but choosing an area in which you are enthusiastic and competent increases your chances of success.
For your home or for earning from real estate
There are numerous methods to profit from real estate. On the residential front, the most straightforward approach is taking out a mortgage to purchase a property, living in it for a few decades, and then selling it for a profit. Meanwhile, you have the independence that comes with owning a house, as well as a variety of potential tax benefits that aren't available to renters.
Commercial real estate can be a source of cash flow and ultimate capital gain if you know what you're doing, while residential real estate can be used to produce revenue by renting it out.
Debt isn't always easy to categorise as positive or negative. It is frequently determined by your financial status as well as other variables. Certain sorts of debt may be beneficial to certain people but detrimental to others.
Therefore, it is necessary to understand and analyse the various aspects and reasons for which the debt is being availed and the uses it will be put to.
