Good Debt Versus Bad Debt

Debt is due for a rebrand, because there is such thing as good debt. So often when we hear about debt in the news, it’s within the context of “bad debt.” Households in over their heads with credit card bills and interest payments. Students working three jobs to chip away at college loans. House-poor millennials saddled with mortgage payments. All because they tried to get in on the market before it moved even further from reach.

But not all debt is bad. There are ways to leverage it in order to open up economic opportunities that will advance your financial plan. The key is to learn how to talk about it and cut through the noise.

While mortgages, student loans and investing in your business are often classified as good. Cars, credit cards, and vacations are commonly seen as bad, it’s a bit more complicated than that. For instance, what if that car helps grow your business opportunities or what if you’re living beyond your means with the mortgage?

It’s time to re-calibrate the way we look at debt and see how it can be used to your advantage.

Understanding the gray area

I often look at the dividing line between the two as if it increases your net worth or has future value, it’s good debt. And if it drains your wealth and decreases your value, it’s bad debt. But this also negates the point that all debt comes at a cost and that cost of borrowing needs to be considered. Further to that, the cost of your debt should be considered in your financial plan.

Ask yourself: Are you borrowing money at the best possible rate and are you prepared if interest rates rise in the future? How will leveraging this debt improve your finances in the future? And what’s your response if things go awry?

Part of keeping debt from turning into bad debt is stress-testing the different scenarios, knowing your comfort level, and developing a plan.

Using good debt to your advantage

My role as your financial advisor is to set you up for the future. Part of that is managing both the good and bad. Together we can identify strategies that help you to your advantage. From mapping out your cash flow and identify the problem areas to prioritizing expensive delinquent accounts over lower interest and less pertinent debts. Debt can be restructured into more beneficial vessels that allow you to draw equity or consolidate the amounts you owe.

So don’t let debt’s bad rep get in the way of a good strategy. Talk to me about how it can fit into your plan.

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Financial Advisor Erie CO focus on investments, wealth management, retirement in Boulder, Louisville, Niwot, Lafayette, Windsor, Berthoud, CO

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.