Money secret No. 25: How can debt be good?

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Many of us have learned that debt is bad. But it’s important to know that not all debt is bad! Bad debt is debt that’s incurred through consumption (such as credit card debt) or short-term loans with high interest rates for making large purchases (such as a couch or a really nice vacation). These types of debts are bad because you’re not building wealth with them – rather, you’re incurring expensive liabilities. They do make it possible to have something in the short term, albeit linked with the burden of paying it off over a long period of time.

Good debt is debt that increases your total assets.

All the things you own and that completely belong to you count as part of your total assets. An example of good debt would be the debt you take on when you purchase a house or an apartment. Because the real estate is used as a security or guarantee for the debt, the interest rates are generally lower than those for consumer credit. A bank that loans you money for this is better protected and assumes less risk than if it only loaned you money that you spent.

These are the fundamental truths about debt: You should only borrow money with the lowest possible interest rate, and you should invest that money into something that yields a higher return than the interest rate you’re paying. You might also consider borrowing money to buy a rental property or to start a business.

Money secret No. 25: Remember that there is also such a thing as good debt. Learn how you can use good debt in your own life and compare offers to get the lowest possible interest rate.