Are you in debt? Most of us are to some degree, but not all debt is bad. There are two kinds of debt. Good debt helps you get ahead in life. Bad debt holds you back. So how do you know the difference?
What is good debt?
Good debt contributes to a healthy financial picture and helps you plan for the future. It might include a mortgage, an RRSP loan or a student loan. Even your first consolidation loan could be good debt if it helps you get the bad debt under control.
Consider your debt good, if:
- it's used to purchase assets that appreciate in value (home) or have the potential to generate income (investments).
- it improves your future. For example, the education you get with your student loan should help you get a job with a higher income.
- the interest is tax deductible.
- it's offered at lower interest rates.
- you have assets that offset the liability of the debt. For example, your mortgage is a liability, but you also have the house as an asset.
What is bad debt?
Bad debt is any debt that doesn't improve your financial position or future. It’s convenient, which can lead you to make impulsive or poor purchasing decisions. Too much bad debt can negatively affect your credit score and seriously impact your life.
Consider your debt bad if:
- you use it to purchase lifestyle items or items that rapidly depreciate in value such as a vacation, a big screen TV or a very expensive car.
- you use it regularly for consumption goods or services such as eating out, groceries and fuel.
- it comes with high interest rates.
- you don't have assets to offset the liability. If you finance a vacation, you have debt as a liability but no asset to balance it.
Now look at your debt. Is it mostly good or mostly bad? If you feel like you need help getting a handle on your situation, we've got tips to create a plan to tackle your debt or you can always talk to a Servus financial advisor about building a debt management plan.