Good Debt Vs. Bad Debt
In today’s harsh economic climate, where words like “recession and layoffs” enter the realm of dinner table conversations and no longer are merely academic abstractions, many people are exceptionally worried about how to manage their debt.
The plain and simple fact is that it is harder to get credit now than it was before the Wall Street fallout. Banks and lending agencies are now more worried about the average citizen paying back the money she owes than they were a few months ago. This translates into the average person having to pay more for the debt they occur. This added cost of debt coupled with the economic uncertainty that puts all jobs at some degree of risk means that most people should be very concerned with the debt they incur. Too much inappropriate debt can force your family into bankruptcy, or at the very least, into uncomfortable situations. Thus in times of economic uncertainty, it is best to restrict your overall debt, as much as possible, and save, as much as possible.
Yet, all debt is not bad debt. A smart consumer will recognize that to some degree, everyday we are alive, we face some risk- whether it is being laid off or having the main income provider in the family fall ill- so it is impossible to totally eliminate the risk of debt, no matter how good the economy is. Like all risks in life, there is a difference between good risks and bad risks. For example, buying a new Corvette in a down economy in order to show your neighbors how awesome it is to drive a fast car is a bad risk. Rather differently, however, is buying a modest sedan that you use to expand your home bakery business. The difference is simple: good debt allows you to increase the future amount of money you make, bad debt allows pleasure without any financial reward for its inherent risk.
Life is nothing without some fun, but it is always better to pay directly, with your excess earnings, for your pleasures and live within your means than to lose your home. Good debt does not have to be void of pleasure either. For example, suppose you have an intense interest in personal finance, good debt could be using some of your credit to take some accounting courses at the local college because this provides you marketable skills that could increase your salary, or make you more effective at work. Typically, good debt allows you to either make more money, learn a new skill, or buy an asset with historically increasing returns (like a house), while bad debt allows you to enjoy something that has no lasting benefit.
In a bad economy, limit your total debt by living within your means. Even good debt can be risky and have bad consequences if used too freely. So, use the benefits of this risk wisely, to maximize your long- term returns, and consult a certified financial expert, who can consider your case in all its unique particulars. For additional online resources, please see the list below.
Helpful Web Links:
http://www.fanniemae.com
http://www.federalreserve.gov/consumerinfo/savingsresources.htm