What is good debt and how is it useful?

There is reason to argue that having no debt is better than having a lot of debt. However, many people can only afford to buy important items like a house by borrowing money and going into debt. While these types of loans are normally justifiable and provide value to the borrower, there is another end of the spectrum when debt is incurred irresponsibly. While it is simple to distinguish between these two extremes, it is more difficult to judge other debts.

Let’s first try to understand what good debt is.

The classic saying “it takes money to make 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 improves your life and that of your family in other important ways is also acceptable.

How can good debt help? Let’s take a few examples to understand this.

Education

In general, the higher the level of education, the greater the earning potential. Education also has a positive impact on the ability to find work. Workers with a higher level of education are more likely to hold well-paying positions and have an easier time finding new ones if the need arises.

A few years into the workforce, a college or technical degree can often pay for itself. However, not all degrees are created equal, so it is important to think about the short and long term implications of any subject of study that interests you.

READ MORE: How much debt is actually too much debt?

Money for your business growth

Borrowing money to start your own business falls into the category of good debt. It is generally satisfying both financially and psychologically to be your employer. It can also be extremely stressful.

Starting a business, like paying for education, is risky. Many businesses fail, but choosing an area in which you are enthusiastic and skilled increases your chances of success.

For your home or to earn real estate

There are many methods to profit from real estate. Residentially, the simplest approach is to take out a mortgage to buy a property, live in it for a few decades, and then resell it for a profit. Meanwhile, you have the independence that comes with owning a home, plus a variety of potential tax benefits that aren’t available to renters.

READ MORE: 5 ways to avoid getting into debt

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 generate income by renting it out.

Debt is not always easy to categorize as positive or negative. It is often determined by your financial situation as well as other variables. Certain types of debt can be beneficial for some people but harmful for others.

Therefore, it is necessary to understand and analyze the different aspects and reasons for which debt is used and the uses that will be made of it.

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