Ronika Khanna breaks down good debt from bad. Good debt: mortgages, student loans, business credit that build assets or earnings. Bad debt: credit cards for impulse buys, unaffordable car loans, buy-now-pay-later with no lasting value. Ask yourself: will this help me earn more or build something that lasts?
Questions this video answers
Will this help me earn more, build an asset, or create something of lasting value?
Chapters
Hello. In today's newsletter I am talking about good debt versus bad debt.
This was inspired by a colleague of mine who recently bought a house and his mortgage payments are actually less than what his rent is going to be. But he still feels that psychological burden that comes from having debt, and so consequently it's impacting his financial decisions. And I think this is something that we can all relate to. We have a lot of debt, we just kind of feel bad. But it is really important to understand that there is a difference between good debt and bad debt. And in this video I'm going to show you what the difference is and we'll go through a couple of examples of good debt versus bad debt debt. So what exactly is good debt? And good debt is anything that helps you improve your financial position or your net worth or has the potential to improve your situation in the future. So examples of good debt include purchasing a home, taking on a mortgage to buy a home which gives you an asset that not only are you building equity towards, but also might appreciate in the future and result in a gain when you sell it. Another example of good debt is investing in education. So taking out student loans, and student loans, if put towards a useful degree for university education, a trade school, nursing or electrician, etc. Can help you to significantly increase your future earnings. So this would also be good debt. And a third example of good debt are small business loans or lines of credit that help you to grow or expand your business. And the amount by which you can contribute to the profitability of your business can significantly outweigh the cost of that debt, which are the interest payments. But of course, as we know, not all debt is good debt. And there's some bad debt. And some examples of bad debt include credit card debt that you cannot repay on a monthly basis. And so this is often for impulse purchases. You might, you know, see a really cute dress, or you might want to replace your phone, or there's a variety of things that you purchase but you can't really afford and you can't pay it off. So that accumulates in your credit card and the amount of interest that you're paying is just sort of wasted. It's not really helping your bottom line in any way. It might help with your happiness a little bit, but that short term and then that feeling that you have this burden of debt begins to weigh on you. Similarly, when you buy a car, even though you're acquiring an asset, most cars depreciate significantly the minute you buy it. So, so as you drive it out of the lot, it's worth less than what you just paid for it. And so therefore, of course, a lot of people need cars and it's important to have one, but it should be something that's within your budget. And another type of bad debt might be one of those buy now, pay later plans that are becoming increasingly available. And those also add to your debt amounts. And they don't. Unless you're buying something that can be a future investment, it's not again, helping you. It might just in fact be hurting you. So really there's actually at the end of this, there's one question that you should be asking yourself when you are about to go into debt. And that question is, will this help me earn more, build an asset, or create something of lasting value? And if the answer to that question is yes, and you're in a position to repay that that debt in a timely manner, then it is something that you can absolutely take on. However, if you do not answer yes to that question, then you should much more carefully consider whether it is necessary to incur that debt. In conclusion, debt isn't inherently your good or bad. It's a tool. And so when you use it strategically, it can be really helpful in building your net worth and ultimately improving your financial future. When used impulsively, it can have the opposite effect where it reduces your net worth, it adds a psychological and actual financial stress, and it might limit your ability to take on debt in the future. For the things that that really matter, I hope this was helpful. If you have any questions, don't hesitate to leave a comment and I will try my best to answer it. And I would love to hear the ways in which Deb has been helpful or hurtful to you. Have a great day.
