Good Debt and Bad Debt – How to Manage Money

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balance For most people debt is unavoidable. Even some of the wealthiest people in the world struggle with their finances. The important thing to understand is that there is a difference between good debt and bad debt. This article will help you discover how to manage money and ease your way into becoming debt free.

Some quick facts about debt are just downright scary:

About half of all Americans spend more than they earn each year.

The average household carries more than $10,000 in credit card debt.

In the past decade, personal bankruptcies have doubled.

What is Good Debt?

Good debt is an investment. Good debt such as home mortgages, student or business loans are almost always a wise decision. Why? Because they generally do not lose money. Clearly the housing market crash in the U.S. does not back up that statement, but if you think about it, many people were eyeballs deep into ‘bad debt’ before the crash and could no longer afford that ‘good debt’. Without a doubt, in 5 years most homes will be way up in value.

Student and Business loans are also a form of good debt. They are an investment on the future and if properly researched they will pay for themselves many times over. Understanding good debt and bad debt will teach you how to manage money.

Good debt also includes things that you NEED but are unable to afford up front. In these cases be sure you are able to afford the monthly payments before you take on this type of debt.

What is Bad Debt?

Bad debt is buying something that loses value or will cost you more money down the road.

“When you buy something that goes down in value immediately, that’s bad debt. If it has no potential to increase in value, that’s bad debt.” (Eric Gelb, CEO of Gateway Financial Advisors and author of “Getting Started in Asset Allocation”).

Other forms of bad debt are buying things you don’t need and can’t afford. To make matters worse, many people make these purchases on their credit cards and end up not being able to pay off the balance in full. If you borrow money to pay for items such as vacations, clothes and entertainment and are unable to pay the balance of the credit card you will end up paying A LOT more for that item than it is actually worth.

How Do I Eliminate Debt?

Good debt and bad debt don’t need to co-exist when you know how to manage money. There is a pretty simple way to eliminate bad debt fast so you can start to chip away at the good debt. This may seem like it goes against all logic but try this: pay off your smallest debt first. This is a great way to set goals, see the results and become more motivated to paying off the larger debts. Keep in mind you must maintain the minimum payments on everything else. You will see the results and be that much closer to being debt free.

A common phrase heard throughout the world is: ‘I wish I could become debt free.” For most that statement is merely a wish. For others it feels like an unachievable dream. For some people being debt free is a reality. You can be that person. It is important to understand what causes debt, what solutions exists in managing debt as well as understand good debt versus bad debt. There is a way to start making that debt free wish into a debt free reality.

I referenced moneycentral.msn.com for some information and quotes for this article.

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