Debt is probably the most misinterpreted concept in the world of finance. People are too afraid to take on debt and try to stay at a distance from it. It is always considered a financial burden that hinders your financial growth.
But frankly speaking, all debt is not bad.
Just imagine: Can you live your entire life without being in debt? It’s a difficult question to answer because you may not want to take on debt now but is it possible to maintain it throughout?
You have to understand that debt is not a terrible thing, only if you are responsible. Know about the basic difference between debts and consciously make better debt decisions.
The Two Debt Types
So let me first start by explaining the difference between debts as we unfold this multi-faceted concept.
What is Good Debt?
We have heard it a billion times ‘ It takes money to make money.’
Good Debt is debt that helps you generate more income and increases your net worth. So any debt that you take on to make more money and augment your existing wealth is Good Debt.
It includes education loans, home loans, business loans, etc.
What is Bad Debt?
Bad Debt is just the opposite of Good Debt.
Any debt that doesn’t generate income or adds up to your net worth is considered bad debt. It is debt that you take on to keep up with lifestyle inflation or for buying depreciating assets like Credit Card loans, a Car, etc.
But It Is Not All Black and White
Now that you know that not all debt is bad let me drop in a truth bomb – Categorising debt is not that simple.
It is not just about if the debt will amplify or condense your net worth but also about the level of influence it has in either boosting your financial well-being or consolidating it.
E.g., An education loan may look justified to you because technically, it is a Good Debt.
But here is the catch:
Does the course that you are signing up for will help you make more than what you invested?
People often ignore these details; a debt is only worth taking when utilized to help you make more than what you invest.
Similarly, if you are taking a loan for a house considering it as an appreciating asset, have you done the leg work to determine if the house has the potential to appreciate?
Another point that I would like to bring up here is Credit Card loans; People consider them damaging. But you can be smart and use credit cards to your advantage.
First off acknowledge it that credit card is not free money and you have to pay it back.
Use credit cards to spend on items that you anyway have to pay for, like groceries, electricity bills, etc., and earn points. Then use the points earned for leisure and pay your Credit Card bill before the due date to avoid incurring any interest.
If you use credit cards this way, it can’t be considered as bad debt.
So the only way to be smart about debt is to factor in all these minute details and weigh the pros and cons before concluding.
Tackling Debt and Building Investments Both Go Hand in Hand
Considering that you have read this far, I presume either you are in debt or are looking to take on one. Being a good friend, I would like to tell you that please don’t put away savings and investing just because you have to repay debt.
It happens so frequently that people use debt as an excuse to not contribute towards investing, which is a big NO-NO. I know it can sometimes be burdensome to continue contributing towards your investments while you repay your debt but let me tell you, it is totally worth it!
If you fail to keep up with your investments, it’s only going to slow down your financial growth, and I bet you don’t want that. Try saving small sums while battling debt and contribute towards investments that require minimum amounts to get started, like SIPs, Cryptocurrencies, etc.
Debt Is Not the End
Lastly, If you are in debt, I would only like to tell you that it’s a part of life and one’s financial journey. In no way you can’t pull through and build a robust financial future for yourself if you are in debt.
Just be cautious of what sort of debt you get into in the future and follow these tips to start your investing journey while still in debt.
Wishing you a debt-free future!
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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