‘Good’ Vs ‘Bad’ Debt
Is there such a thing as ‘good’ debt or ‘bad’ debt, or is it all just debt? The word “Debt” sounds scary to most people and may carry a negative connotation. We believe when categorizing credit use, it’s important to look at it through the lens of one’s core values and the purpose for taking on the debt. We identify two key characteristics of “Good Debt”:
If the debt has the potential to lead to a long-term financial gain or increase to one’s net worth it can be a great thing. A great example of this is a mortgage for a home, or a business loan for future income and equity.
We at Two Tugboats Wealth Management pride ourselves on our focus on “Values-Based” financial planning. If the debt can help one reach a meaningful personal goal, it can be a good thing, when managed responsibly. Something like taking on a student loan and going back to school to finally get that degree or taking on an auto loan for the minivan you need now that you have 3 kids. These personal wins may not directly result in financial gain but are important investments in the things that make our lives meaningful.
On the other hand, some debt can be harmful to one’s financial picture. We’ve categorized “Bad Debt” by two main characteristics which are:
Expensive, meaning it comes with a high interest rate now, or a variable interest rate that could become high in the future. In the 3rd quarter of 2024, the average interest rate on credit cards in the US was 21.76% (Shulz).
Unnecessary, meaning debt that is used to finance purchases that will have very little return or a negative return. Consumer credit cards are a great example of both. Credit cards make it easy to overspend, aiding the holder in developing the bad habit of purchasing goods for which they don’t have the money. Along with that, credit cards usually come with a very high interest rate.
Overall, we believe debt isn’t inherently ‘good’ or ‘bad’, there are simply better or poorer uses, based on one’s values or financial situation. We recommend consulting with a Financial Planner to help make sure the debt you’re taking on is a smart choice for you and your family.
Shulz, M. (2024, November 13). 2024 credit card debt statistics. LendingTree. https://www.lendingtree.com/credit-cards/study/credit-card-debt-statistics/
