Debt is a funny thing and how it works. It’s easy to accumulate and hard to get rid of. Debt is Debt in the end, but I’m sure you’ve heard of good debt and bad debt. There is a god as they say and good debt too. However, with that being said, debt also varies from decade to decade. If you’re in your 30s, your debt will slightly or in some cases totally be different than someone who’s in their 20s, 40s or 50s. With that being said, I will examine a few examples of good debt vs bad debt by decade.
This is the time when one starts their post-secondary education, taking on student loans and start-up costs to begin a career.
Student Loan, which provides the necessary funds to develop the necessary skills to increase future income. Think of it as an 4-5 yr investment, with a high dividend return (bi-weekly pay check). Another good form of debt may be a Business Loan or debt incurred to start up a business, which in turn gives one the opportunity to earn an income. Finally don’t forget that either debt incurred via student loan or start up business, is tax deductible.
1. Credit Card Debt – Not paying off the credit card balances on monthly basis or at very least, the minimum payment.
2. Auto Loans – Buying more car than you need to. A car purchase can be considered good debt, but only if you are buying a car within your financial means.
3. Personal Loan – Any type of loan with a high interest rate, spells a disaster, so it’s best to avoid.
Dirty Thirties (30s)
This is the time of life when most people take on a new home mortgage and in some cases, their second (bigger) home mortgage, if they already purchased a property in their 20s.
Any debt that is incurred for an appreciating asset can be good, yet this asset does not have negative consequences to daily cash flow. Good examples are student loans for a career or a mortgage for home equity.
Debt that carries high interest charges and where the repayment period outlasts the consumption period. An example of this would be using a line of credit to pay off a credit card, yet one is using their credit card for daily life purchases. This is an example of revolving debt.
This is the time when people make some of their more larger purchases, such as a bigger home for the family, boat, cottage or second home (investment home). During this decade, personal debt increases.
If you are using the equity from your first home, to buy a larger family home, but that falls within your budget and what a person can afford. Don’t become mortgage broke. Also if you invest, such as a second home, maybe use it as rental income and gain equity.
Spending beyond your means, buying more car or home than you need to. Somehow couples become more competitive with family friends and/or neighbours. If they have a fancy car, we got a get one as well.
Keep the following in mind: Savings – 10% – Housing 35% – Transportation – 15% - Life 25% – Debt Repayment 15% – If you are spending more in any one of those categories, you need to examine your expenses.
This is the prime time in life not to have debt. Instead enjoy what you’ve worked hard for during your 20s, 30s and 40s.