Good Debt, Bad Debt

College is overpriced. Looking at amortization tables and college loan calculators might make you feel all’s hopeless. It’s not. You must recognize the difference between good debt and bad debt.

Good debt gets you to where you want to go. Bad debt puts you in a hole you can’t escape. How do you know the difference?

Here are some examples. You’re starting a business. You borrow a thousand dollars to get you off the ground, but you’re working your day job, so God forbid something happens, you can make the payments. Your business succeeds. You pay off that debt.

Good debt is debt that helps move you forward: 

You pay for your gas with a card and pay it off once a month. Good debt.

You finance a used car. You know it costs $200/month, but you can afford the payments. Your goal is to establish good credit with the loan.

You want to go to college for nursing. A degree is required. You look at several colleges, choose the one that gives you a great financial aid package, and borrow the least amount of money you can. You borrow some money but work a second job over the summer and pay down the debt as soon as possible.

You buy a car at 0% interest and pay only the payment–you don’t overpay the loan. Instead, you invest the rest of the money you have, making a return, effectively using that car loan to give you money to make money.

Bad debt is debt that can bury you. 

You fall victim to a credit card offer at a 21% interest rate then start carrying a balance.

You buy a car that you can’t really afford.

You take loans to pay for a college that doesn’t give you the maximum aid, then say, “It doesn’t matter, my career in XX should make enough.”

You overextend borrowing for your business or expand too fast using other people’s money.

Critical questions: 

How can you use debt to your advantage?

What types of debt can save you, and what types of debt can bury you?

What are the effects of compound interest on any loan?

Math moment: 

We’ve been using calculators to look at compound interest. Here’s the math behind the calculator. Try one or two compound interest problems. Have a victory moment. Here are a few you can defeat. Check your answers. Don’t cheat. You’ll get bad karma.

P.S. Compounding works both ways. You can spend money with debt but you can make it on the flip side investing. More on that later. Learn the effects of the math.

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