Debt Do’s and Don’ts

With the economic woes of recent days, it’s nearly impossible for many consumers to live completely debt free. There are, however, different types of debt. Some will benefit you in the long term, while others will do nothing but harm you for years to come.

The average U.S. household with at least one credit card carries nearly a $10,700 balance, according to CardWeb.com. This leaves the question of whether debt is a good or bad. The answer is it depends.

Good Debt

There are times when a debt can actually be a good thing. Good debt improves your life in the long run. While bad debts can improve your life only for a short time, good debt can actually improve it for years to come.

Example of good debt:

* Your home. The key to a home being a good debt is that it is a home you can actually afford. In many cases this simply isn’t the case. When you can afford the monthly mortgage payments, taxes, insurance, and other fees that go along with owning a home, an affordable home is a good investment.

* Education. The value of a college education cannot be stressed enough. This investment will pay for itself tenfold. Accruing debt to get an education is worth it. This investment will pay for itself over time and, if you manage your money properly, will permit you to pay back the debt rather quickly.

* Rental or investment real estate. Real estate has always been a sound investment and probably always will be. If you wisely purchase real estate and charge more in rent than your payments are, your investment will paid back quickly and you will then reap a profit.

* A car. Some mistakenly believe since a car depreciates quickly in value that it’s not a sound investment. This simply is not true. Cars are essential in our society today and can be a wise investment, provided you purchase a car you can easily afford. Owning a car allows for you to get a job, go to school, and do other things that permit you to make more money than the car’s lost value.

Bad Debt

While there are some debts that are not a bad idea, there is a type of debt that can leave you strapped for cash and financially devastated in the long term. These types of debt leave you little or no return of your investment in the future. In simple terms, a bad debt is anything you consume or loses value over time.

Some examples of bad debt include:

* Vacation. While a vacation is certainly nice for refreshment, it does nothing for you in the coming years. It is not wise to go into debt for something that is really more of a luxury than a necessity. Vacations, particularly costly ones, are appropriate for those who can afford to pay for them immediately.

* Food. Eating is a vital component of life, however, it is not wise to accrue debt for. The simple reason is that food is immediately consumed and offers nothing for you or your money in the future.

*Toys. Items used for play are not just for kids! Anything purchased for sheer amusement is not a wise purchase to go into debt for. These items offer no long term value and can cause problems in the long run. This includes items like TV’s and video games. Not only do these items not accumulate value, they also frequently lead to even more entertainment purchases. For example, a new video game player requires video games.

Debt is a common phenomenon in society today. In fact, in many cases it’s inevitable. There are some things that offer a long term investment and return on your money that make them a much better debt option. Items that lose value and don’t offer any potential return on your money simply are debts that should be avoided.