Good Debt vs Bad Debt: What Builds Wealth (and What Destroys It)
Intro
Debt gets a bad reputation — and for good reason. Many people are buried under credit card balances, payday loans, or car payments they can’t afford. But not all debt is created equal. Some debt can actually help you build wealth and create generational security. The trick is knowing the difference.
👉 I tell clients: good debt puts money back in your pocket, bad debt takes it out.
🧾 What Is Good Debt?
Good debt is money borrowed to acquire something that can grow in value, generate income, or expand your opportunities.
Examples:
Mortgage: Property typically appreciates over time. Each payment builds equity you can tap later.
Student Loans (within reason): Education can lead to higher earning potential over a lifetime. A $40K loan for a degree that boosts income by $20K/year can pay for itself many times over.
Business Loans: Used to launch or expand a profitable business, generating income streams for years.
👉 Handled responsibly, good debt is an accelerator — it helps you grow faster than cash alone.
🧾 What Is Bad Debt?
Bad debt is money borrowed for something that quickly loses value or provides only short-term satisfaction.
Examples:
Credit Cards: With ~20% APR, balances can snowball. A $5,000 balance can take decades to pay off if only minimums are made.
Payday Loans: Often 300–400% APR. These traps keep borrowers stuck in cycles.
Car Loans (overspending): Cars depreciate the moment you drive them off the lot. A luxury car loan can set you back years on wealth building.
👉 Bad debt doesn’t just cost you interest — it costs you the ability to invest and compound wealth.
📊 Why the Distinction Matters
Good Debt Builds Wealth: Example — A $200K home bought with a mortgage at 5% interest could be worth $300K+ in 10 years. Equity grows, while housing costs stay stable.
Bad Debt Destroys Wealth: Example — Carrying a $10K credit card balance at 20% interest means ~$2,000/year wasted on interest payments alone.
Final Thoughts
Debt is a tool. Use it on appreciating assets, and it builds wealth. Use it on depreciating assets, and it bleeds you dry. The key is to leverage good debt strategically — and avoid bad debt traps altogether.
