The amount of personal debt is ever increasing, and a large part of the reason is that credit has never been easier to get. Whereas credit card issuers previously looked for customers who could repay, today card issuers relish the chance to reel in those who'll continuously charge beyond their means at 18 or 20 percent.
But debt is a complex concept. Not all of it is good -- a fact a surprising number of people fail to realize until they're in the hole -- and yet not all of it is bad. When used intelligently, debt can be of tremendous assistance in building wealth.
One of the secrets, therefore, to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that apparently is missed by many Americans.
"When you buy something that goes down in value immediately, that's bad debt," says David Bach, CEO of Finish Rich Inc. and author of The Finish Rich Workbook. "If it has no potential to increase in value, that's bad debt."
Good debt
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO of Bill Free / American Credit Counselors, a nonprofit debt counselling service in the U.S. "If you go into debt buying an apartment building that will produce revenue and deductions, that's good debt. Mortgage debt is good debt. You're borrowing money, but you're getting a tax advantage and can write off interest on an asset that's appreciating over time. Plus, you get to live there."
Robert D. Manning, a professor of finance at the Rochester Institute of Technology, also recommends taking on debts that are tax-deductible, and debts that produce more wealth in the long run.
"If you are talking about reducing current debt, that's where it starts to get nuanced," says Manning. "If you take a home equity loan because you have 17 percent credit card, and you go with a 6 percent loan that's tax-deductible, that's good debt."
These general rules of thumb set some clear delineations -- buying a home or refinancing to get rid of excessively high rates is usually good debt, as is generating debt to buy high return stocks, bonds and other investments.
But debt is a complex concept. Not all of it is good -- a fact a surprising number of people fail to realize until they're in the hole -- and yet not all of it is bad. When used intelligently, debt can be of tremendous assistance in building wealth.
One of the secrets, therefore, to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that apparently is missed by many Americans.
"When you buy something that goes down in value immediately, that's bad debt," says David Bach, CEO of Finish Rich Inc. and author of The Finish Rich Workbook. "If it has no potential to increase in value, that's bad debt."
Good debt
"Good debt produces cash flow, and bad debt doesn't," says John Waskin, CEO of Bill Free / American Credit Counselors, a nonprofit debt counselling service in the U.S. "If you go into debt buying an apartment building that will produce revenue and deductions, that's good debt. Mortgage debt is good debt. You're borrowing money, but you're getting a tax advantage and can write off interest on an asset that's appreciating over time. Plus, you get to live there."
Robert D. Manning, a professor of finance at the Rochester Institute of Technology, also recommends taking on debts that are tax-deductible, and debts that produce more wealth in the long run.
"If you are talking about reducing current debt, that's where it starts to get nuanced," says Manning. "If you take a home equity loan because you have 17 percent credit card, and you go with a 6 percent loan that's tax-deductible, that's good debt."
These general rules of thumb set some clear delineations -- buying a home or refinancing to get rid of excessively high rates is usually good debt, as is generating debt to buy high return stocks, bonds and other investments.
