In Budget 101: Pay Yourself First, we tackled how paying oneself first after receipt of every paycheck is tantamount to setting aside a specific percentage of one’s salary before expenses are taken into consideration.
In Budget 101: Live Within Your Means, we defined means as income inclusive of savings, and in Budget 101: Learn To Say No, we pointed out why acknowledging someone’s limitations is vital to attaining one’s dreams of a healthy financial life.
A good number of people believe debt is nothing but bad. That is not entirely true. In this world we live in, it is almost impossible even for the most financially responsible Juan or Petra to purchase everything in cold cash without liquidating investments or depleting cash reserves.
Depending on the reason for the debt, debt can be good or bad.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net
So when is debt bad? Financial experts agree on some sort of a rule of thumb: Debt is good if it is used to purchase something that will appreciate in value overtime. Debt is bad if used to purchase consumables or something that loses value in the long run.
Good debt
Mortgage on a house is generally considered good debt. Despite the cost of maintaining one’s own house, in due course, it is still preferable to renting. Debt to finance an education falls under the good debt category as this increases a person’s chances of getting a better paying job.
Bad debt
A car loan, on the other hand, falls under the bad debt category. In five years’ time, a brand-new car loses 50% of its original value.
Credit card debt, given the nature of the things credit cards are swiped for, is usually considered the worst form of bad debt if not paid in full and on time because of high interest rates and other penalties. Debt to finance a vacation is also another form of bad debt.
Now taking on debt, even when considered good, that is beyond a person’s paying capacity is NOT a financially sound idea.
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Maricel, this is a very informative post to me! I was able to differentiate which is good or bad debt and another yes, I agree that home loans are better than car loans!
Tristan, I’m glad you took away something from my post today. Thanks for visiting!
Great tips Maricel!
If I can only pay all my debts, then my salary would be more than enough… I might be able to even buy a used car… sigh.
wish i can do that…pay myself first. 🙂
c5 @ http://ceefive.com
I know you can do it, Marvs. The key is to not take on any more bad debt, if you can handle it. Good luck and I wish you the best!
I’m sure you can, C5. It’s all a matter of getting used to. Like everything else, it would be daunting at first. But in time, it gets much easier. Good luck! 😀
Cel, those info comes very timely! =)
I’m still thinking of which one to pursue, either to get a housing loan and car loan. Now, I had an idea… thanks a lot! 🙂
I was glad to help, Ariston!
My writing skills is no match for you. Hehe. Thank you po Ate Maricel. It took me 5 hours to write that article. =D Thank you po..
http://www.eymardeas.com/good-debt-bad-debt/
Eymard, now that’s not entirely true. You, too, have a voice. Just keep on writing. And thank you for visiting. 😀