Bad Debt is any loan that is used to buy something that will depreciate in value. Cars, furniture, clothes, are just a few items that are worth less and less as you use them. Credit cards that are not paid off in full every month are also in this bad debt area. Avoid using it at all. Buy only what you can afford in cash.
This may mean you will have to do without some luxuries now, but interest on loans can cost you years, even decades of work as you get older. Don’t take my word for this, learn the math. It is spelled out in our free e-books “Money Smarts for Teens” or “Money Smarts for Young Adults”.
Good Debt is borrowing money to buy something that will appreciate in value. The family mortgage is an example of this. Plan to make sure this debt doesn’t eat up too much of your budget. Buy used furniture to begin with will help you avoid the bad debt syndrome.
Better Debt is borrowing money to buy something that will appreciate AND you get to use the interest expense as a tax write off. Buying an apartment building, investing in a business or buying mutual funds with borrowed money are examples of this.
Warning: This ‘better debt’ is a step that should not be taken lightly. A fool would jump at this without serious for thought and assessing the risks and inconveniences involved.
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