Debt: The Good, the Bad, and the Ugly Debt
Understanding the Distinction Between Good Debt and Bad Debt What You Need to Know
Understanding the Difference Between Good and Bad Debt
Image by Manu Prats x mbg creative
October 6, 2023
Debt, ah, that ominous four-letter word that haunts our dreams and gets us sweating through our silk pajamas at night. But don’t worry, my fellow fashionistas, because debt can also be a fabulous tool that opens the door to your dreams. It’s all about understanding the difference between the good, the bad, and the downright ugly debt. And as your fashion-forward financial fairy godmother, I’m here to guide you through the glittering world of debt.
What’s So Good About Good Debt?
Now, what makes debt good? Well, think of it as that fabulous pair of designer shoes that makes your legs look a mile long. Good debt is like that, it helps you snap up valuable assets that can grow your wealth. Picture business loans, home mortgages, and student loans strutting down the runway, turning heads and making your financial portfolio sizzle.
According to the fabulous Caitlynn Eldridge, a certified public accountant and founder of Eldridge CPA, good debt is all about the potential to generate income or increase the value of your assets. Just like a slinky evening gown that hugs all the right curves, mortgages are considered good debt because historically, home values have risen by about 3-5% each year. Jeff Rose, a certified financial planner and founder of GoodFinancialCents.com, adds that student loans can be a wise investment, considering that individuals with a bachelor’s degree earn around 55% more than those with only a high school diploma over their lifetime. And let’s not forget about those business loans that can expand your empire and make your profit margins soar. Talk about fashion-forward financial moves!
The Ugly Side of Bad Debt
Now, let’s switch gears and talk about the dark, grimy side of debt. We’ll call it the fashion faux pas of the financial world. Bad debt is like buying a knockoff Louis Vuitton bag that falls apart after one use. It’s debt incurred to buy things that lose value faster than a clearance rack during a sample sale. Think cars, furniture, and clothes you’ll forget about faster than last season’s trends.
And here’s the kicker, bad debt usually comes with sky-high interest rates that can make your jaw drop faster than a runway model tripping in six-inch heels. According to the Investopedia card database, the median interest rate for all credit cards in September 2023 was a staggering 24.12%. Yikes! And if that’s not enough to make your Louboutins quiver, payday loans can reach interest rates that exceed a jaw-dropping 400%. It’s like getting caught in a fashion emergency with your dress caught in your Spanx.
The Debt Game: Rules to Slay By
Fashionistas, debt is all about playing the game with style and grace. Remember, even good debt can turn into a fashion disaster if you’re drowning in more bills than Carrie Bradshaw on a Manolo spree. So here are the rules to slay the debt game and keep your financial fashion on point:
- Low interest rates are always in style: Seek out the lowest interest rates possible and pay off your debt faster than Marc Jacobs can reinvent the little black dress.
- Don’t be fooled by short-lived fashion trends: Be savvy and evaluate the true costs. If you’re lusting after that 0% interest deal that skyrockets to 18% after 12 months, ask yourself if you can pay it off in time. Otherwise, you’re in for a financial fashion flop. Remember, my darlings, the interest rate can make or break a fashion statement.
- Cash flow is your runway: Before strutting down the debt aisle, make sure you have a positive cash flow, and save a decent amount of money as your emergency fund. Consider it your financial fashion insurance policy.
- Do a little soul searching: Take a moment to evaluate your needs versus wants. Ask yourself, “Do I really need it?” If it’s a dream you can’t currently afford, start saving up for it instead of diving headfirst into a credit card spree.
Unleash Your Inner Financial Diva
To truly conquer your debt and embrace financial freedom, my fabulous readers, you need a payoff plan that’ll make heads turn. Trust me, it’s like finding the perfect red lipstick that sets off your whole ensemble. Here’s what you do:
- Go for the knockout: Pay off your bills in full to avoid those hefty interest charges that can leave your finances feeling as heavy as a three-layered tulle gown.
- Build momentum like a true fashion icon: If you have multiple debts, use the snowball method to tackle them one by one. Start with the smallest balance, make minimum payments on the rest, and give that smallest balance your all until it’s gone. Then move on to the next. It’s like strutting down the financial catwalk with each bill you conquer.
- Crunch those numbers: Fashion is all about the perfect fit, and debt is no different. Crunch those numbers, consider your future earning potential, and find the harmony between your financial goals and your fabulous life. It’s like finding the perfect little black dress that flatters your curves and makes you feel like a million bucks.
Now, my lovelies, go forth and conquer your debt like the fashion-forward financial divas you are. Remember, a little debt can be a stylish stepping stone to your dreams, but too much debt can cause a fashion meltdown. Stay fabulous, my darlings!
Leaving you with a question: What debt strategies have you used to slay the fashion game of finance? Share your stylish tips and tricks below!
