No crunching numbers, no excess need for financial knowledge, no stressful thinking, just consider this simple factor before getting into any debt.
Financial planning is an important skill and habit to develop given our current economy. Undoubtedly, there are several needs to attend to such as tuition fees, emergencies and car loans, to name a few. However, without truly understanding the financial choices we’re making, we can incur an unwanted debt. Alexis from @alexisanddean interviewed her banker husband, Dean, on this topic and shared a video on how to classify good and bad debt. In this TikTok video, Dean highlighted the type of expenditures that are advisable under the umbrella of debt.
The video began with Alexis asking her husband, “What is good debt and bad debt? Is there good and bad debt?" That’s where the banker came into the picture. Giving his input, he said, “As a banker, bad debts go south. Good debts are debts that are placed upon an appreciating asset.” An appreciating asset can be anything that gives back to you in some form. Elaborating further, Dean cited an example, “Car loans are bad debt because cars are a depreciating asset. Credit card debts are f**king terrible bad debt," since they typically encourage spending habits. He went on to say that there are emergencies and critical needs that need to be fulfilled with a credit card. In cases of medical emergencies, debts cannot be helped at times. However if one were to use their discretion then, "getting into discretionary things like ‘traveling stuff’ that's bad debt,” Dean states, as those are debts that could be avoided.
Dean was highlighting the need for cautious expenditure to avoid these ‘bad debts.’ He added, “Real estate is always good debt. It’s finite and appreciated in general.” Dean also said that education is not always necessarily a good debt as that can be subjective. There are instances where it can account for a bad debt. A good debt Dean pointed out, “has to be an investment. Generating the debt should provide you with an investment because you need to borrow to invest.”
He explained why investment is a core factor to consider when it comes to debt: “It gives you a benefit more than the cost in the long run.” One needs to ensure that the investment they are borrowing to invest in, makes them more money in the future than the loan amount. It all adds up to Dean’s previous examples of the car and credit car. Things like a car or a huge lifestyle purchase may not necessarily get you anything in the long run. You’d be spending and getting yourself into a debt with nothing coming back to you.
Dean’s points boil down to the idea that if whatever you’re spending on isn't going to come back to you with added interest, it qualifies as a bad debt. The video received quite a few views and several people took the advice given by Dean. @vi_orca_girl_ said, "Educational debt is questionable." @shattered_but_whole_boi said, "I wish I had this information growing up during my college years.” With an understanding of the difference between debts, it would be much easier to make smarter financial decisions in the future.