Good Debt?

Is there such thing as good debt? In my opinion the answer is: it depends.

While my wife and I work our way to financial independence we understand that paying off certain debts takes priorities over others. On top of that there are debts that will take years for us to work down like the mortgage and student loan.

Having a car loan, mortgage, and even a student loans are debts that can be healthy for your overall quality of life, as long as you are living within your means. Eventually a car will be paid for and will become an asset. The house will hopefully be building equity and by the time most Americans reach retirement should be paid off. Paying for college would be unattainable for many with out the help of student loans and higher education is a gateway to higher paying jobs.

But there is bad debt. I define bad debt as outstanding credit card debt, car loans for an unnecessary vehicle, and overextended student loans to name a few. I’ll admit I was not frugal in my 20’s. I bought a brand new car that lost 15% of its value when I drove it off the lot. I ate out almost daily and spent my weekends at bars and clubs. I made good money but still paid rent making somebody else wealthy. And when I wanted more money I turned to my Visa.

Eventually I woke up and started to plan for my future. I saved for a down payment on a house and got a mortgage. My wife and I buy used cars that are about 2 years old (I will be paying cash for my next car. Until the money is saved I’ll still be driving the one I have.) Finally my wife and I made a goal of paying down all our outstanding debt based on the highest interest rate first.

The order the debt payoff is prioritized:

  • Credit card debt
  • Car loans
  • Student loan
  • Mortgage

As one category is paid off it frees up more money to pay off the next. A budget is also necessary to understand where your money is going. By identifying bad spending habits my wife and I are able to free up more money to accelerate our payments and create money for savings and investing.

I know this doesn’t apply to everyone but hopefully there is something to take away. Please feel free to share your goals/experiences in the comments below.

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