Good Debt vs Bad Debt: An Explainer on Good Debt

imagesource:indianexpress
imagesource:indianexpress

With Christmas festivities over and the new year celebrations looming over the horizon, you might have already started writing down your resolutions. Now, the astute amongst you may be eyeing not just gymming or dieting but financial wellness as well. The outgoing year was without a doubt one of the harhest yet, however this article may help you take a more informed decision when it comes to a very important aspect of financial wellness. Debt Management. So, lets get on with it by understanding and discerning the difference between good debt and bad debt.

Some might argue that no debt is good debt, that however is an archaic thought process which doesn’t square with the way modern economies are structured. In a credit reliant economy the only way most people can afford basic essentials such as a car or a house is by means of taking on debt. However, on the other end of the spectrum one can also accrue debt by carelessly spending on a credit card. So, a deeper dive is necessary to distinguish the two sides of debt.

Good Debt 

It takes money to make money

One can look at this from an obvious pessimistic point of view, however such thinking would have mattered in the pre-credit way of economy. Currently individuals take on debt to help generate income and increase one’s purchasing power and positively affect one’s net worth. Here are some examples of good debt-

  • Higher Education: Although a case against student loans can be made, however the impact student loans have had cannot be ignored. From a purely economical point of view education is not only directly proportional to a person’s earning potention but has a positive correlation with employability.
    It is just logical that better educated works are more likely to hold jobs with high salary and impact. Apart from that, one must acknowledge the shift in the trend of employment and industry itself. Gone are the days when factories and manual labour constituted the major portion of job sector. Highly academic intensive industries such as artificial intelligence, material sciences, green tech development, etc have come to dominate the majority of high paying jobs due to automation taking up manual repetative labour across the spectrum.
    Thus, debt for the cause of education pays not only for itself by many times over on account of having a high return on interest.
  • Startup/Small Business Ownership: The best way to make economic progress has always been to generate value in the most direct way possible. By starting a business. To leverage your expertise into a self sustaining enterprise is the best thing you can do for yourself. However, it is unlikely that one would have the capital to match the steep cost associated with starting some businesses. One can thus avail a business loan instead of going the path of venture capital as you can retain original ownership over your operations which is always desirable.
    However, it goes without saying that businesses working out is sometimes a matter of luck. Given how the pandemic has forced multiple established businesses to close down one must approach this with caution and proper market research to take a step which has future within the confines of their pragmatic limitations.
  • Real Estate Ownership: This might comes as counter-intuitive for many, however real estate is not just limited to owning a home. It also extends onto the concept of renting as well as capital appreciation. In order to take complete benefit of the system one must secure a long term fixed interest loan, for example if one can secure a loan of 5% interest. Which actually entails a 3% rate of interest on account of inflation being 2% which caves into the capital appreciation. Thus, in order for one to turn a passive income on the same one must rent said real estate out for an amount surpassing the aforementioned 3% rate. Similarly, real estate also always appreciates in value and thus will be worth more years down the line in sync with the development enjoyed by the vicinity among other factors.

These however are only some of the ways in which one can use debt to their advantage and advance their capital appreciations.

We hope you took away an important lesson from this discourse, our detailed explainer on bad debt will be up soon!