Today we’re going to be talking about good debt and bad debt. And my question is, do you think there is a difference or do you think that all debt is bad, or do you think that all debt is good?
The Difference Between Good and Bad Debt
I want to help explain the difference between the two, and explain that sometimes you have to go further into debt, get the things that you need, or get the things that are better for your future.
Before I go further, make sure that you snag my free budget template on my website. I provide you with a single person’s income, budget and expenses and how I would budget that if that was me. *Hint it was me if I was to be single.*
I also provide you with a married couple’s budget that my husband and I used when we were both teaching in the classroom. So snag that, see how I budget and make sure that you are budgeting too.
Also, if at any point in time you want to sit down and pick my brain, or you want me to help you make a budget, have a look over your finances, debt, expenses and income and create a plan for you…go ahead and book a one on one call with me.
This is a 60-minute call where we can sit down and chat about your financial goals. We can identify the problems in your budget, the problems in your current financial situation, and we can talk through them and we can create a realistic plan, a realistic roadmap to get you to wherever it is in your financial future that you would like to go.
Is all debt bad debt?
Is there even such a thing as good debt? Even better. Do you believe that there’s a difference between the two?
As we talk in today’s episode, I think you’re going to come to find that the answer is a tad bit more complex than you think. So I’m going to start with bad debt first.
What Is Considered Bad Debt
What are things that I consider bad debt? 1000% if you have a high interest rate credit card, that is bad debt.
If you have a credit card, but it’s 0% interest for a period of time for the time being, I don’t necessarily consider that bad. But you bet your bottom dollar when that 0% interest period runs up, you better have a way to pay it off. Interest rates on credit cards are anywhere between 15% to 20%, which is absolutely ridiculous.
So number one, hands down, if you have credit card debt, I would be interested to see how much money you are spending on interest alone, month after month. Something tells me that it would probably give me anxiety.
Credit Card Debt
Bad debt is anything that you know you cannot pay off, which is usually credit card debt.
So you may have an Old Navy credit card, a Mastercard, a Citi card, whatever it is. Get out of the habit of having multiple lines of credit that you’re constantly racking up debt on.
If you have credit cards and you use them wisely and you’re able to pay them off month after month, that is awesome. Good for you. That’s what my husband and I do.
But if you can’t control yourself…then I encourage you to cut them up. Eliminate them all together.
For the most part, I would say that credit cards are bad debt. Anything that has an interest rate of about 10% or higher is going to be a red flag for me.
If you can stay away from anything like that, that is going to help you and your financial future so much.
What Is Considered Good Debt
Now let’s get into some things that can be considered good debt.
I recently polled my Instagram audience. If you’re not following me, make sure that you’re following me @meganmendez__. I would love to get your feedback on what I should talk about on my podcast, hear what you guys have to say about controversial money topics. I just love to chat with you, so make sure that you’re following me so that we can be friends.
But anyways! I polled my audience about good debt versus bad debt, and a good amount of you said that you thought all debt was bad. You are entitled to your opinion, and I respect that.
I also want to give you a point of view, or a perspective, that maybe you haven’t thought about. And again, this is coming from my own experience and my own personal journey.
Something that could be considered as good debt is a mortgage for a house.
Now, I know you’re thinking, Wow! $200,000. That’s like the biggest debt of all.
Yeah, absolutely. It is a really big financial purchase. But it’s not so much a bad debt as it is a long term investment.
If you currently rent, which in today’s market, I know a lot of people are renting right now. I completely understand that if that’s the situation that you are in, and you don’t have any other options, then you have to do what you have to do.
But if you have the means and have the financial ability to buy a home, that is going to be such a great long term investment number.
Real estate is so valuable and has a great return on investment.
Whether you’re paying 5% (I think interest rates for mortgages are actually spiking up to seven, eight and nine%), that is something that you can lower later on down the road.
If you’re scared right now to invest in a home because of the interest rates, buying a home is not necessarily a form of bad debt.
Whereas when you rent, you take your $1,500 – $2,000 a month, whatever your rent is, you take that money and you throw it down the toilet every single month.
When you buy a home…let’s say you’re paying that exact same amount in your mortgage, you are actually taking a part of that $2,000, whatever your principal is, and you are putting it back into your home. Then when you go to sell, you’re actually going to get some of that money back.
You’re going to get a return on that investment.
So I highly recommend anybody that is financially capable of buying a home, or investing in real estate, to do so because the return is better than the so-called interest rate that you may be paying. So don’t look at mortgages as bad debt.
Now, I have a car loan under good debt, but I want to make sure that I put a disclaimer on this.
There are a few situations where you may need to take out a loan for a car.
If you get into the situation where you can’t pay cash for a car that you are needing, or two, you end up having to buy a new car because your old one broke down or whatever your situation is.
I don’t know your financial situation.
For me, my lease was up on my car. My mom basically said, it’s your turn, sweetheart. Go buy yourself a car. It’s time you start making the payments. You have to become an adult.
I was like, oh, okay, thanks. So I had to go out and buy a car. That’s the reason I have this under good debt.
But this is the disclaimer: When you go and buy a car, I want you to think about the car that you’re buying and the monthly payment that you’re going to have to make.
Can you make that month after month and it does not put you under? Because if you only have $200 a month for a car payment, but you go out and buy something that’s going to end up being $500 a month, that does not realistically make any sense for your financial goals.
So I say a car is good debt within reason. Because if you’re buying your car it could potentially have a resale value if you go in later to trade it in or if you end up wanting to swap it out in a couple of years.
Whatever your car situation is…for me personally, I’m driving my car until the wheels fall off because that’s just how it’s done. I mean, I don’t financially want to be paying $300, $400, $500 a month for the car of my dreams.
My car gets me from point A to B, and I’m happy with that.
So I say all of that within reason because I don’t want you to spend and go buy this nice luxury vehicle that at the end of the day, you can’t afford.
If you do end up having to buy a new car, or take out a loan for your car, make sure, number one, that it’s a car that has a good resale value if you do go to trade it in later down the road. And number two, that is something that fits within your means.
That’s kind of one of those debts that’s a little gray, just depending on your financial situation. And again, everybody’s financial situation is different.
If you and your husband together make $250,000 and you want to go drive a beautiful Cadillac…my friend, if that is in your financial budget, do it by all means.
You live your life the way that you would like.
Zero Percent Interest Credit
I touched on this earlier, but next I want to talk about 0% interest on credit cards for a period of time.
Again, I mentioned it earlier, but I just want to say this again. You have to trust yourself with credit cards. Sometimes people that get themselves so far into debt, it’s because of credit cards. They have the problem of it being digital money.
They don’t see it coming out of their pocket, or out of their wallet or bank account, so they swipe, swipe, swipe.
The next thing you know, you’re $5,000 into credit card debt and you’re like, how did I get here?
You have the power of the swipe in your hand…and you have to cut that out.
So if you can be trusted with credit cards, then I am a firm believer of 0% interest credit cards for a period of time.
I know sometimes if you open up a new card, they offer it for six months, twelve months, 18 months, whatever. Or if you go to finance furniture, or I guess all furniture would fall under the category of couches and beds and whatever. But if you’re going to finance something and they offer you the 0% interest for 40 months, 60 months, whatever it may be, I don’t necessarily see those as bad debt.
As long as you’re able to make the monthly payments on those, and pay it off by the time that the 0% interest runs out, then to me that is a smart decision. You’re saving money on interest and you’re not technically losing any money. You’re just borrowing it for a period of time.
That one, again, is kind of gray, and I only suggest it if you can be trusted with it.
For example, my husband and I, when we got married, I had applied for a 0% interest credit card. We put literally all of our wedding purchases on that card because buying a home and paying for a wedding all at the same time, is not super ideal. And we were strapped for cash.
That card was something that allowed us to have a nice, beautiful wedding that we loved and enjoyed while also getting to move, and kind of having to redo some things in our home. Long story short, we had to put a lot of home wedding purchases on this 0% interest credit card.
But that worked for us because I’m very goal driven. When I knew that that interest was going to be up in November, that was motivation for me to make sure that I got it paid off.
Debt With a Return On Investment
And then lastly, and I mentioned this a little bit earlier too, but I want to mention any type of debt that is going to get you a return on your investment, a return on your money.
Sometimes you have to borrow money at an interest. You have to pay somebody to borrow that money because you don’t have it on hand.
But if it is going to be able to give you a return of some sort then that is awesome.
This can be kind of complex as well because you have to look at how much of the return you’re getting on your investment. Now that’s a whole other story for a whole nother day.
But generally speaking, anything that can get you a good return on your money I would consider as good debt. I would honestly not even consider it as debt at all.
I would consider it more of an investment.
Good vs Bad Debt
But if you want to keep it as black and white as possible…bad debt is things like credit cards, any type of line of credit that you know you can’t pay off and that has interest rates that are anywhere between ten and 20%, I would consider bad debt.
Good debt would be things like a house mortgage, a car within reason, any 0% interest credit card debt you know you can pay off in time, and any type of loan that you have to take out that you know you’ll get your money back in return.
You’re going to hear me say this time and time again. The main takeaway I want you to always understand is to make sure your money decisions are aligned with your long term goals as it pertains to debt.
Meaning, is that specific debt going to further your objectives and going to help you in the next season of life?
For example, buying a house may be a hefty hefty debt. But if it gets you out of the cycle of renting and throwing cash down the toilet every single month, then absolutely. I would say buy a house if you financially can afford one. Especially if you can qualify for a loan.
I know sometimes that is the hang up with people that want to purchase a home.
By the way, I’m getting off track here, but when I was teaching and I was considering stepping away, one of the career opportunities that I was interested in and was studying was mortgage loans, home loans.
So I’m curious, would you be interested in hearing more about that here on the podcast? I would love to share my knowledge there, so let me know.
Look At Your Credit History
Another thing that you can do is look at your credit. Do you have any “bad debt” on your credit? Meaning do you have anything that’s gone to collections?
Those types of things hurt your credit very badly and can get you into some unfortunate situations.
So if you are able, I would look into disputing any of those charges to see if you can clean up your credit.
If you don’t have any credit cards, but you have school loan debt, or you have other types of debt, like maybe bank loans, you’ll want to build that positive credit for your financial future.
I would recommend getting one credit card that you use for the sole purpose of buying your gas every month and paying it off month after month.
That is going to be something that can help you with your credit history and help you build that positive credit.
As I close it out, I’m curious, do you still think that all debt is bad?
Do you disagree with anything that I said about what I categorize as “good debt”? Or what about the kind of gray area of semi good debt depending on how you do it?
I’m curious, so let me know and shoot me a message about that.
Does Your Debt Align With Your Goals
Lastly, look at your goals and ask yourself, is this debt that I’m going into aligned with those goals?
If you haven’t read the poston The Budget is the Foundation, go back and read one.
Every time that I ask you if a financial decision is aligned with your goals and aligned with your long term vision, and you are trying to make a money decision based on that, if you don’t know what those goals and that vision is, then you need to read the budget post and do exactly what I say. Then come back and reread this one.
Make sure that the financial decisions that you are making are aligned with those long term goals…that they are aligned with your budget.
Because the budget is the foundation and that is what sits and builds upon everything else.
Let’s Visit Your Budget
If you’re curious as to where to start when it comes to your own debt, book a one on one call with me.
We can sit down and go over your financial portfolio and create a path to get you to your goals. We can even work together month after month.
If you are wanting a new BFF to help you along the way, it would be an honor for me to help coach you and walk you through this season of life. I want to help you get you on the other side of your financial goals.
Thank you for joining, and I hope to see you next time.
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More About The Debt-Free CEO Podcast
Are you tired of getting yourself further into debt month after month? Does your mindset around money play a factor in your family’s spending? Do you struggle with knowing which debt to pay off first and how to keep yourself from going further into debt? Maybe you’re a freelancer who struggles with how much to pay yourself each month making it difficult to create a working budget.
In this podcast, you will learn ways to manage your finances to set you on the path to debt-free and on to financial freedom.
I’m Megan Mendez, and I was a tired teacher needing to get out of debt to leave the classroom for good. In 2021, paid off $53,000 worth of debt in 12 months and started my freelancing business shortly after. I’ve been able to successfully pay myself as a business owner and continue on the path to financial freedom and now I want to help YOU do the same!
My hope is that this podcast gives you tactical tips to help you improve your finances and set you and your family’s future up for success. I hope you’ll join me as we journey to financial freedom together.