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.
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.
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.
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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