Good Debt vs. Bad Debt
You may have heard financial experts talking about good debt versus bad debt so what exactly are they talking about?
Generally speaking, good debt is for purchases that appreciate in value or significantly improve your quality of life. Getting a bank mortgage to purchase a home is typically a solid investment as most homes will appreciate in value over time. Investing in your education by taking out student loans can also be a form of good debt as it has the potential to help you increase your future employment earnings.
Bad debts on the other hand typically do not provide you with any long-term benefit. Even though you may need a car for transportation it is still an example of bad debt. The average car drops significantly in value the moment you drive it off the car lot. The most common example of bad debt is credit cards, especially if you carry a balance each month and make only the minimum payments. People tend to use credit cards for dining out or entertainment which has no long-term benefit or lasting value.
At the end of the day, there really is no such thing as good debt and it is best to have no debt at all. Unfortunately, that’s not realistic for most of us so we have to do our best to reduce or eliminate bad debt.
According to Statistics Canada, debt levels continue to hover near all-time highs set in 2013. Canadians owe just over $1.63 for every $1 in disposable income they earn in a year. Mortgage debt, or good debt, stands at roughly 1.1 trillion, however, consumer debt, or bad debt, still exceeds $507 billion.
If you carry a heavy amount of bad debt and only able to make minimum payments then it’s time to look for help. There are several consumer options to help you manage, pay down or settle debts so it’s important to seek professional advice.
Powell Associates Ltd. is a Licensed Insolvency Trustee (LIT) focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice.