Although taking debt is acceptable, it is something that nobody wants to have. An iconic indication of financial well-being is often associated with the ability to live debt-free. Although it can be seen as a cliché, it is something that we want to achieve. In the meantime, we need to be able to manage our debt situation. Many people see debts as bad things, but we shouldn’t avoid them at all cost. Debts can actually be good for a number of reasons and especially if we are able to manage them. Good debts can be used to purchase something that we need today, especially if the item can make us productive. The rule of thumb is that by being productive, we should be able to repay the debt in the reasonable amount of time and once the debt has been repaid completely, we already have a full functioning business that can provide us with steady profit. If we can do this, then we are dealing with good debt.
However, identifying good debts can be rather tricky, especially if we need to consider a number of factors. The overall costs of debts may make a single type of debt not worthwhile. Mortgage is generally a good debt, because it puts a roof on our heads, but we should know about the annual rate and other factors. If we splurge during an eating oyt session with the family using our credit card, we may feel the effect for the rest of the month; which can be seen as a bad debt. If we want to do that, it is better to save some money and pay with cash. If we don’t have enough saving, then it is a good idea not to take this kind of debt. The potential loss of income can be quite immense if we are still struggling to pay off te debt. Good debt can be identified by the large opportunity cost. It means that if we don’t obtain the item we need, then we could potentially lose an opportunity to get specific amount of money.
As an example, we may borrow an amount of money with an interest rate of 4 percent per year. But if we put the same amount of money in an investment platform, we will have an annual gain of 8 percent per year. If we transfer the loan to the investment program, we will get 4 percent earning per year. The same case also applies with a small business. Say, we need $20,000 to open a hamburger stand in a busy area and based on conservative projection, we will be able to double the investment in 3 years. This is equal to 33 percent return for each year. Both are examples of good debts. Student debt can also become good debt, if the formal education that we obtain could help us to get a good job. As an example, after we graduate, the annual repayment of the student loan is $6,000; but the education allows us to get a job with annual salary of $45,000. This is more than enough to offset the student loan, especially for young workers who are not married yet.