The difference between good debt and bad debt involves needs versus assets. Not all debt is bad! Suze Orman – author of Women and Money and other personal finance books – explains the difference between good debt and bad debt.
A woman wrote to Suze Orman in the July ’08 issue of Oprah Magazine, saying that she owes $20,000 on her credit cards. She also has a $165,000 mortgage, car payments, is paying off a home equity loan, and “lives life to the fullest.”
This debt-ridden woman takes her kids to water parks, museums, the YMCA and Disneyland regularly. She’s still overspending – and she doesn’t see the problem. “What’s so wrong with being in the red?” she asks Orman. “We live paycheck to paycheck, but we’re happy.”
She asked about the difference between good debt versus bad debt, and I’ve posted Orman’s answer below.
If you have bad money habits, read Women & Money: Owning the Power to Control Your Destiny.
Good Debt Versus Bad Debt – Suze Orman Explains the Difference
“Debt itself isn’t bad. It’s the way you choose to handle it that’s mind-boggling,” says Orman. “If you care one iota about your kids, you need to start caring about money. I wouldn’t be surprised if they end up financial disasters because of the example you’re setting.”
Orman says that not only will this mom not be able to help out with her kids’ education (which I don’t think is a big deal – I took out student loans and worked my way through university) – but this lady will probably end up on the kids’ doorsteps when they’ve grown up because she’s hasn’t saved for retirement. That’s the difference between good debt and bad debt — which affects whether you’ll achieve your financial goals.
The Key to Financial Well-Being
“Knowing the difference between good debt and bad debt is the key to financial well-being,” says Orman.
Good Debt is money borrowed to purchase an asset: homes or mortgage, education or student loans, etc.
Bad Debt is money borrowed to finance a “want” or a depreciating asset: cars, credit card balances, home equity lines, etc.
If you’re financing a car, Orman suggests a three year loan – no longer. She also says that leasing doesn’t make sense because it keeps you perpetually in bad debt. Plus, living paycheck to paycheck doesn’t feel good; it’s a source of perpetual stress.
Instead of stressing about money, you need to learn how to manifest a big fat paycheck with the law of attraction!
If you’re like me and wondering if a bachelor’s degree was worth it – you can celebrate! Suze Orman says, “Census data pegs the average lifetime earnings of a high school graduate at a million dollars below that of someone with a bachelor’s degree.”
For more info on how debt can work in your favor, read 4 Types of Good Debt.
What about you – do you have good debt or bad debt? Comments welcome below…