Is debt always a bad thing?

In recent years we have heard a lot about the dangers of having too much debt. In large part that is a legitimate concern. However it is also important to understand that not all debt is bad. Debt is simply a tool and used correctly it can really help your finances. The trick is knowing how to use debt properly so that it helps you rather than hurts you financially.

Not only is debt not always bad but there are times when it is actually a good idea to borrow money. The key is to be able to tell when debt is good and when it is bad, unfortunately a lot of people have trouble with this. The result is that there are many people with serious debt problems. Basically good debt is when you are borrowing money for something that will increase your net worth. The most obvious example of this would be when you take a mortgage to buy a house. Since it is likely that your house will increase in value this would be considered good debt.

There are lots of other examples of good debt; a home improvement loan is usually good debt. So is borrowing money to contribute to your retirement fund. In some cases it may be good debt if it gets rid of worse debt, for example using a home equity loan to pay off your credit card debt. The money you borrow doesn't necessarily have to directly increase your net worth to be considered good debt. Most people would consider a student loan to be good debt since you are investing in your future earning power.

One thing to keep in mind is that you can still get yourself into financial trouble with good debt. Your investments can turn against you, look at all the people who have lost their homes recently or seen the value of their home actually decline. This is not to discourage you from borrowing money to make investments in your future but you do have to be careful to make sure that you are not borrowing more than you can afford. If you can't pay your bills it really isn't good debt anymore no matter what it was spent on.

Obviously there are lots of examples of bad debt; one of the worst is credit card debt. The reason for this is partly the absurdly high interest that is charged. However the even bigger problem is what the money is being spent on. In most cases the things bought with credit cards will not increase in value, often they are consumables. If somebody told you that they had borrowed money at twenty percent interest to go out for dinner you would think they were insane. However this is exactly what you are doing every time that you use your credit card in a restaurant.