WalletFriend Wisdom Tip #10: Good Debt or Bad Debt?

Sometimes it may seem that debt is a never ending downward spiral, and for this reason, many people want to get out of debt as soon as possible, and for the most part, they are not wrong. But what if I told you that being in debt doesn’t always have to be a bad thing?

Although some debt is inevitable and unavoidable, there are debts that can be beneficial to achieving your financial goals as well.

Remember in our previous tip #9 we went into buying stocks, and in other tips, we spoke about the fact that it doesn’t matter how much you put aside? Well investing and putting aside a little bit at a time can be a bit confusing and contradicting. For this reason, we will tell you a bit more about having good debt and bad debt. This tip will definitely change the way you think about debt.

So what exactly is Good Debt?

To put it simply, good debt is the kind of debt that puts money back into your pocket. So what are examples of good debt? Well, basically good debt can be your study loan, your mortgage, or even business ownership. These are debts that can put money back into your pocket.

How good debt works

Well, let’s say you borrow RM300,000 from the bank to buy an apartment. You have to pay the bank this RM300,000 back in 35 years at an annual interest rate of 5%. This means the first year you would need to pay the bank RM18,168.72 (that’s a monthly payment of RM1,514.06).

If you rent out the flat for RM2,000 a month, in a year you would have made RM24,000. Of that RM24,000 you would have paid the bank RM18,168.72. At the end of the year, you would have earned RM24,000 – RM18,168.72= RM5,831.28. Doesn’t earning an extra RM5,000+ a year sound amazing?

Remember this is just an example of how good debt can work, the numbers and example used above is simply to clarify what good debt is.

But then what is Bad Debt right?

Basically, bad debt is the opposite from good debt, this type of debt takes money out of your pocket. And usually, it’s best to get out of bad debt as soon as possible or just avoid getting into it in the first place.

An example of bad debt would be a credit card, the reason why credit cards are viewed as bad debt is that people often use it to buy products like cars, flat screen TVs or even book vacations. These are all things that lose value once you buy them and end up taking money out of your pocket.

However, this doesn’t mean that you can’t do any of this, but instead you should try not to get into bad debts too often or too much.

Now you know a bit more information about good debt vs bad debt. We hope this will help you in further achieving your financial goals. Remember to keep checking back with us for more future tips.