Good Debt vs. Bad Debt

What if going into debt was one of the smartest financial moves you could make? It sounds wrong, but the world’s most successful people and companies use debt as a tool. They borrow money constantly. The secret isn't avoiding debt entirely; it's understanding the critical difference between debt that builds you up and debt that tears you down.

Not all debt is created equal. The simplest way to think about it is to separate it into two categories: good debt and bad debt.Good debt is money you borrow to buy something that will likely increase your net worth or your ability to earn more money in the future. It's an investment. Examples include:A loan for education or training that leads to a higher-paying job.A loan to start a business that can generate income.A mortgage to buy a home, which is an asset that typically grows in value over time.Bad debt is money you borrow for things that lose value immediately or don't generate any income. Think of it as borrowing for consumption. Examples include:Credit card debt for clothes, vacations, or meals out.A loan for a brand-new car, which loses a huge chunk of its value the moment you ow...

Kwame, 18, got accepted into two university programs. One was for software engineering, a field with high earning potential that he found interesting. The other was a general arts degree that many of his friends were choosing. Both would require him to borrow about 30,000 units of his local currency. Instead of just following his friends, Kwame did some research. He found that the average starting salary for a software engineer was nearly double that of the general arts degree. He mapped it out: the engineering loan was an investment in a high-paying skill. The other loan was for an experience, but with a much lower financial return. He chose the engineering program. Kwame realized the loan wasn't just a price tag; it was an investment in his future earning power, and he had to choose th...