know all about Good Debt Vs Bad Debt

Good Debt Vs Bad Debt – All You Need to Know

Living a completely debt-free life may take you a while to reach but you certainly need to know all about Good Debt Vs Bad Debt.

Good debt helps you increase your net worth and build wealth. Bad debt leaves you owing money on depreciating assets with little or no promise of getting a return for the money you have invested.

Debt can help you increase your net worth. It is important for you to know the difference between Good Debt and Bad Debt so you can position yourself to take charge of your personal finances.

Good Debt Vs Bad Debt

 

Good Debt

When you take out a Mortgage, Educational and Small Business Loans could help you build wealth. Good debt helps to increase your purchasing and earning power on assets leaving you better off in the long run.

Bad Debt

Credit card loans, Auto Loans, and Payday Loans can be piled up under bad debt. When it comes to the question of how much debt is too much, there is a simpler way of answering; Borrow what you can afford, according to financial advisors.

Debt-to-Income-Ratio

To be able to determine how much debt is okay, you need to know how much you make every month before taxes, insurance, social security, etc. are taken out of your paycheck (your gross monthly income). You also need to know your total recurring monthly debt or borrowings.

Debt-to-Income (DTI) ratio, expressed as a percentage, is your Monthly debt / Gross Monthly Income. For example, if your total monthly debt is $3,000 and your Gross Monthly Income is $6,000;

DTI = $3,000/$6,000 works out to 0.5 or 50%.

If your DTI is higher than 40%, it is considered risky and getting a mortgage, for example, will be difficult. Financial advisors recommend DTI between 20% to 28% as acceptable.

How To Tell You Have Borrowed Too Much

  •  Use of a credit card to pay off essentials like food and gas
  • You pay off one credit card with  another
  • High debt-to-income ratio
  • Inability to meet emergencies such as auto repairs and medical health expenses
  • Net worth is less than zero (negative net worth)
  • Credit card payments are more than your mortgage
  • Late on loan repayments; car, rent, utility bills, etc.
  • Borrowing money from friends and family
  • Can’t pay off your total credit card debt in a year
  • Unsure of how much you owe in total
  • Used too much of your available credit so your credit score has declined considerably
  • Don’t have $3,000 for an emergency fund

Here Is What You Need To Know

Good and Bad debt both carry risks. Buying a house, considered good debt, may not give you the desired results; supposing your house doesn’t appreciate in value. If you take an educational loan and you get no job offers or low paying jobs, you may be burdened by debt. Without a proper business plan, taking a small business loan may be a bad decision. The business may fail due to poor business planning. Even though these are considered good debt, other factors relating make it risky.

Read Also: How To Make Extra Money For Yourself

Try to be conservative as much as you can when you  take out loans for any reason that makes it. Unexpected events make paying off debt worrisome. Take less and only borrow what you can afford so you don’t have to worry your head so much over paying bills. When it comes to debt, it all gets down to “Borrow what you can afford comfortably.”

Stay on top of your finances with all these facts you know on Good Debt Vs Bad Debt.

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