We all fear debt, the weight of owing money and mounting bills. Borrowing money to pay for an item, or debt, is the way most of us pay for the big purchases in our lives like a house or car, and it has become a fact of life.
However all debt isn’t created equally. There is in fact a good kind and a bad kind of debt, and knowing the difference, and managing both wisely, is the key to financial freedom. Do you know which type of debt you have?
Know the phrase “it takes money to make money”? Well this old saying perfectly sums up good debt. Good debt helps you generate income and increases you net worth and improves your long-term worth if it is used to fund appreciating assets such as student loans, or a home which is seen as an investment in your future.
If you borrow money for something that will likely drop in value, that’s bad debt. When you purchase luxury items that you want and don’t need and cannot afford to pay for them or the monthly repayment, when you continue to use your credit cards or one month loans that you cannot repay and if you borrow money from unregulated financial institutions, you’ve got bad debt.
3 simple ways to help you stay out of bad debt
- Know the difference between wants and needs. Don’t take out a loan you can’t afford to repay for a want and not a need.
- Spend less than you earn. Every month try to put aside savings by spending less than you earn.
- Practice patience. Save for those items you want and purchase them with cash in hand instead of taking out debt and incurring high interest rates on your monthly repayments.