Debt occurs when you are given money in exchange for an interest rate charged on the borrowed amount. Depending on the interest rate, debt can fall into two categories: good debt or bad debt.
Debt has become a relevant topic in today’s world of financial uncertainty. The more financially stable you are, the more you excel in your day-to-day life. This stability improves your purchasing power and enhances your living standard.
While borrowing money today may make sense when you are in a bind, the interest rate charged on this money can become a major inconvenience and can even hinder you from obtaining your goals. There could be several reasons for an individual or an organization to take debt. For example, organizations may borrow a huge sum of money in the form of a loan in the hope of expanding their business. Another common reason for taking on debt may be that entrepreneurs want to expand or start their venture and take out a loan.
How Good Debts Help You Grow Financially?
When searching for the meaning of “good debt,” one will find it described as a debt that increases your net worth and helps you generate substantial income, which enhances your financial portfolio. For example, an education loan that one borrows in the hope of getting a quality education to brighten their future. One of the reasons an education loan is a good debt is because it (hopefully) will pay off in the long-term. Education from a reputable institution shapes and molds our intellect and prepares us to succeed in the professional world.
In a perfect world, education corresponds to better employment opportunities and well-paying jobs. Having a degree makes you more desirable to employers and increases your earning potential. Your college degree should pay for itself in time; therefore, the loan you borrow in pursuance of quality education is worth all the effort and money you put into it.
In contrast, a mortgage is also a good debt because you finance your house with it. Real estate’s value has grown quite exponentially, making owning property an investment. To put it simply, a mortgage is a good debt because of its equity in the future.
You can also strive to make yourself financially stable by investing in income-generating projects or shares.
What makes a Debt, and how Does it affect your financial stability?
Some assets depreciate with time. If you invest in an asset after getting a loan that does not mature in value over time, you have put a dent in your financial position in the long run. This is the situation of a “good debt” turning into a “bad debt.” So, it is always better to look for ways to increase your financial position because, after all, you must pay a larger-than-life interest rate against the amount you borrow in the loan as well.
The Thin Line …
Borrowing money can be an exhausting and draining ordeal. Many worries and skepticisms surround the process—one being that you must return the amount (plus interest) in time. If payments are not made in a timely fashion, it could be detrimental to your financial position.
Additionally, differentiating between “good” and “bad” debt may be difficult for some, and you find yourself making some bad decisions that hurt your financial stability. To avoid this, you need an action plan. Sort out your priorities and use the right strategy to make these debts generate robust income for you. Chances are, with the profits you earn, you will be able to return even the interest rate charged on your income without any struggle. Ensure that you are not investing in any asset that does not have the same or more value over time, as this can cause severe repercussions.
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