Good Debt, Bad Debt, or No Debt?

A question that troubles a lot of people about their financial health these days is?"What debt is good enough: Good debt, bad debt, or no debt?!"

Well, the answer that we have for you will thrill you, as it is not like anything you expect. So, stick with me in today's edition of my finance newsletter!

To put it simply...

The answer is all three. Yes! All kinds of debt are good. And I will explain in a bit.

But well, it depends on the situation—and it's not as simple as you might think.

Bad debt is something that puts you at risk of defaulting on a loan and losing your credit score. Bad debt is an investment that doesn't pay off. In the short term, you may see some gains—but over time, your losses will outweigh the gains, and you'll be left with little to show for your efforts.

Consider an example when you take a loan to buy a new pair of shoes, go on a vacation, or make a bad investment that yields no return, or anything at all that does not improve your financial outcome. Ridiculous, right?

But it happens.

If you've got bad debt, try to pay it off as soon as possible. That way, you don't have to worry about it anymore and your credit score won't suffer any damage from missed payments or late fees.

Good debt helps you build up your credit score by showing lenders that you can be responsible with money. Good debt is an investment that pays off in the long term. You'll see a net gain after making payments on it for a while because the cost of borrowing money is less than what you can earn with that money in the future.

If you have good debt (like student loans), try to pay them off as quickly as possible so that they don't hurt your credit score or take away from an emergency fund for unexpected expenses like car repairs or medical bills.

And finally, no debt is ideal—but it's not always possible. Even the rich still borrow.

No debt is a great way to build wealth over time. If you're paying off your mortgage or student loans, for example, you're investing in yourself and building something that will appreciate over time—something that will have value later on down the road even if its price drops now.

In essence, no debt is all "bad." Your ideal solution just lies in the kind of debt situation that you're in.

As an instance, say you are at a stage in your life where you need to build a house or develop a land, then you are most likely going to need a loan. Taking out a loan to complete this project puts you in a "good" debt because a house or land property is considered an asset that can build value overtime.

Now, you may be thinking that keeping a clean debt record is the ideal thing to do; so, you would rather build your property all from your purse. While this is a good idea (if you can afford it), on the other hand (if you cannot afford it), it may lead you to spend your money on the wrong things.

As a behavioural philosophy, there is a lavish spending attitude that humans develop in response to lack. A report I once read online mentioned that nearly 44% of young Nigerians in their 20's that made their first million naira spent a huge chunk of it on frivolities.

As a trigger, your mind reacts to the eventual escape from this 'lack' with lavish. So, it is very likely that when you are self-funding to build your house, you will begin to spend on other things that you deem "more important" at the moment than the house; and slowly, bad debt, poor financial management and sometimes, regret, are the consequences of bad spending choices.

Bad debt may not be ideal; but it is debt, anyway. If loans are known to do anything to the human mind, it is to drive us to take actions quickly with the money that we have borrowed.

Because you know you borrowed it and it should be paid back, you will most likely get to work with it sooner.

Nobody borrows for bad debt, but good debt management can help ascertain that you make the wrong investment choices less often.

Agree?

What about you? How do you view debt?

And how did your new week kick-off? I'm itching to read every one bit of it. Why don't you shoot me a reply? I'll be happy to read.

Until I write to you again, I remain?Barbara Esangbedo, your favourite money coach.