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All debts are not created equal. Understanding the difference between good debt and bad debt can be the linchpin to a sound financial future.
The term “debt” often conjures negative connotations, evoking images of mounting bills and financial strain. However, not all debts weigh you down; some can be strategic stepping stones towards financial growth. Let’s break down the concepts of good debt and bad debt.
1. What is Good Debt?
Definition: Good debt is generally considered an investment that will grow in value or generate long-term income.
Characteristics:
- Low-Interest Rates: Typically accompanies assets with enduring value.
- Potential for Appreciation: Examples include mortgages for homes that may appreciate over time.
- Future Returns: Like student loans, where the goal is to increase earning potential.
Tip: Before acquiring good debt, evaluate the potential ROI (return on investment) and ensure your earning potential aligns with repayment capabilities.
