Good debt is debt that you take on to achieve meaningful growth in your personal life or finances, like a mortgage or student loan. Bad debt is relatively expensive debt and debt that someone takes on for unnecessary expenses, like credit card debt.
Debt can be good or bad. Debt used to help build wealth or improve a person's financial situation might be considered good debt. Debt that's unaffordable or doesn't offer long-term benefits might be considered bad debt. Debt that might be considered good has the potential to become bad if it's not managed responsibly.
Examples of good debt may include: Your mortgage. You borrow money to pay for a home in hopes that by the time your mortgage is paid off, your home will be worth more. In some cases, you can deduct the interest on mortgage debt on your taxes.
Debt, by itself, is a direct negative impact to net worth. Net worth is the ultimate measure of wealth. The answer is that, used wisely and with a thoughtfully prepared plan, debt can build wealth if it is money invested to increase revenue greater than the cost of the debt.
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
Good debt is money you borrow for something that has the potential to increase in value or expand your potential income. For example, a mortgage may help you buy a home that can appreciate in value. Student loans may increase your future income by helping you get the job you've wanted.
They stay away from debt.
Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
Generally speaking, cars purchased with a large down payment and with a short-term car loan are considered to be good debt. That's because large down payments usually mean lower interest rates. Further, a shorter loan term means you'll pay less in interest over the life of the loan.
Basically, a passbook loan is a loan you take out against yourself. You are borrowing from your bank or credit union using your savings account balance as collateral. A passbook loan uses the balance of a savings account as collateral, which makes it lower risk for a lender.
Mortgages are seen as “good debt” by creditors. Since the mortgage debt is secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use. They also see home ownership, even partial ownership, as a sign of financial stability.
By utilizing debt, money can be borrowed and put towards assets such as property or shares with the potential for creating wealth. This is what's known as 'gearing'. The value of these investments should increase over time, providing greater income and capital growth than would have been spent servicing the loan.
Interest rate / Annual Percentage Rate (APR)
The APR is the amount of annual interest plus fees you'll pay averaged over the full term of the loan. Focusing on the APR allows you to better compare the cost of borrowing from different lenders, who may all have different fee structures.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.
NerdWallet's annual analysis of household debt finds that revolving credit card debt is up just 1.5% compared to 2023. On average, a household with revolving credit card debt owes $10,563. [1] Mortgage, auto loan, student loan and overall total household debt have also all increased slightly from last year.
If credit card balance is not paid in full, debt is owed on products that have already been consumed or that lose their value. A loan used to buy a car is considered bad debt because the car can lose more than half its value by the time the debt is fully repaid.
How much car can I get for $500 a month? The answer depends on how much you put down, the interest rate and the length of the loan. Let's say you put no money down and took out a 72-month loan with a 6% APR. In that example, your $500 monthly payment would get you a car that sells for between $25,857 and $28,900.
Wealthy family borrows against its assets' growing value and uses the newly available cash to live off or invest in other assets, like rental properties. The family does NOT owe taxes on its asset-leveraged loans because the government doesn't tax borrowed money.
Good debt is generally considered any debt that may help you increase your net worth or generate future income. Importantly, it typically has a low interest or annual percentage rate (APR), which our experts say is normally under 6%.
Others will object to taxing the wealthy unless they actually use their gains, but many of the wealthiest actually do use their gains through the borrowing loophole: They get rich, borrow against those gains, consume the borrowing, and do not pay any tax.
Another thing that may come as a shock to some people, myself included, was that only 31% of millionaires in this study averaged over $100,000 a year throughout their careers.
The people who have all the money often go by unnoticed, dressing well, but without flash, driving used cars and living in the first house they bought in a modest neighbourhood. The authors called them the quiet millionaires. They often work in, or own, unglamourous businesses that spin off steady streams of cash.
They are stacking debt strategically, one after another in different opportunities because they're putting it into safe avenues with consistent success. This is one way that the wealthy can use debt to maximize and grow their wealth even more and very consistently.