Can student loans ever be considered bad debt?

Yes. While education can be a great "good debt" investment, if your chosen career field doesn't offer the earning potential to comfortably repay the loans, they could become a financial burden. It's important to research earning potential and likely debt load before making decisions about higher education.

Is it okay to have a small amount of credit card debt if I pay it off each month?

Generally, yes. As long as you pay the balance in full before interest accrues, using a credit card responsibly can help build your credit score without adding to your debt burden.

My mortgage is my biggest debt. Is that automatically good debt?

Usually, yes. However, if you've overextended yourself and the monthly payments are a struggle, even a mortgage can impact your financial stability negatively. Buying a home you can comfortably afford is key.

I'm trying to save for a down payment. Should I avoid taking on any debt in the meantime?

Not necessarily. If you have good credit, a strategic use of a low-interest credit card (paid off each month) can help you build your credit history, which might qualify you for a better mortgage rate down the line. However, avoid high-interest debt that drains your savings potential.

I have some savings. Should I use them to pay off my bad debt, or invest them?

This depends on the interest rate of your debt vs. the potential returns from your investment. If your debt interest rate is high (like many credit cards), prioritize paying it off aggressively. If you have low-interest debt, a balanced approach where you pay extra on the debt while also investing some of your savings might be wise. Consider consulting a financial advisor for personalized advice.

I'm self-employed. How do I classify business-related debt?

Debt taken on to grow your business (equipment, marketing, etc.) is usually considered good debt if it generates more income. However, be cautious about overspending. Speak to an accountant or tax advisor for specific guidance on classifying business debt in your situation.

Good Debt vs. Bad Debt: Understanding the Difference

Not all debt is created equal. In the world of personal finance, you'll often hear the terms "good debt" and "bad debt" thrown around. So what do they mean, and how can you use this knowledge to make smarter financial decisions? Let’s dive in.

What is Good Debt?

Good debt is essentially a loan that has the potential to improve your financial situation in the long run. It's considered an investment in yourself or your future. Here are some common examples:

Mortgages: A mortgage helps you purchase a home, a major asset that often appreciates in value over time.
Student Loans: Investing in your education can lead to a higher-paying career, boosting your earning potential.
Business Loans: Taking out a loan to start or grow a business that generates income.

What is Bad Debt?

Bad debt costs you money, usually through high interest rates, and doesn't contribute to your long-term wealth building. Here's what to watch out for:

High-Interest Credit Card Debt: If you're only making minimum payments and carrying a balance, those interest charges add up quickly.
Payday Loans: These come with extremely high fees and interest rates and should generally be avoided.
Depreciating Assets: Financing a car, boat, or fancy electronics that rapidly lose value.

The Key Difference

Good debt generally works to increase your net worth over time. Bad debt tends to reduce your net worth or keep you stuck financially.

Using This Knowledge to Your Advantage

Prioritize good debt: If you need to borrow money, focus on investments that can benefit you down the road.
Minimize bad debt: Create a plan to tackle high-interest debt as quickly as possible.
Budget wisely: Don't let "lifestyle creep" lead to impulse buys that land you with bad debt.

Understanding the difference between good debt and bad debt is crucial for making wise money choices. Aim to use debt strategically, prioritize paying down high-interest debt, and focus on building your wealth for the long haul.