Debt is a reality of modern life, and while it can be a useful tool for achieving your financial goals, it can also lead to financial distress if not managed well. Therefore, it is crucial to understand the difference between good debt and bad debt.

Good debt can be defined as debt that is used to improve your long-term financial position or net worth. For example, taking out a home loan to purchase a property can be considered good debt. This is because a property is an asset that typically appreciates in value over time, and as you pay off the loan, you are building equity and increasing your net worth. Other examples of good debt include student loans, which can lead to higher earning potential in the future, and business loans that can help to grow your business.

On the other hand, bad debt is debt that is used for consumption-driven purposes and doesn’t have lasting value. Examples of bad debt include high-interest credit card debt, payday loans, and retail accounts. These types of debt can quickly spiral out of control, leading to financial distress and even bankruptcy.

Understanding the difference between good debt and bad debt is a sign of good financial knowledge. By using debt wisely and avoiding bad debt, you can improve your financial situation, build wealth, and achieve your long-term financial goals.