With all we've discussed about debt so far, it's necessary to approach the concept of Good Debt and Bad Debt.
Good Debt
Good Debt follows the concept "spend money to make money". Quite literally, you're investing into some future gain that you are hoping for; the benefit to having acquired the debt, outweighed the liability of carrying the debt. Often, these investments make a lot of sense, but of course, as always when planning years ahead, it might not work out the way you planned it. The typical examples for good debt are:
- College or Technical Education
- Real Estate
- Small Business Ownership
Bad Debt
Bad Debt is usually those expenses that go beyond your means and are spending on things that are not really necessary. We also call these expenses "discretionary expenses". Very often the state of your credit card bill can give us a good idea of how much bad debt we have. However, it makes sense to look closely:
- The purchase of a designer bag, on a credit card with an interest rate of 21%, not budgeted for = bad debt.
- Holidays to Europe on a credit card = bad debt
Extra Debt
Extra Debt is debt that is on top of the good or bad debt. It is usually created by not paying off the monthly good and bad debt. You miss a car loan payment. That creates more debt plus interest and late penalties next month. It can start creating more and more addition debt and be very hard to pay it off. It needs to be addressed asap. Your Budget Plan does have a Planner to assist in reducing any Extra Debt.