Good Debt vs. Bad Debt

"All debt is bad" sounds wise. It's not. It's like saying "all calories are bad." A candy bar and a salmon fillet are not the same thing, even though they both contain calories. Debt works the same way.

The difference comes down to one question: Is this debt putting money in your pocket, or taking it out?

What makes debt "good"

Good debt has three characteristics: it's low interest, it funds something that increases in value or increases your earning power, and you can afford the payments without stress.

• A mortgage -- You're buying an asset that historically appreciates, and your payment replaces rent you'd pay anyway
• Student loans (sometimes) -- If the degree significantly increases your earning potential and you borrow responsibly
• A business loan -- If it funds a venture with realistic potential to generate more income than the loan costs

What makes debt "bad"

Bad debt funds consumption. The thing you buy starts losing value the moment you swipe. And the interest rate is usually punishing.

• Credit card debt -- 20-25% interest on stuff that's worth half its price by next month
• Car loans on too much car -- Cars lose 20% of value in year one. Financing a $60K truck on a $50K salary is a wealth destroyer
• Buy now, pay later -- The modern version of credit card debt, disguised as convenience

The gray area

Reality isn't black and white. Student loans for a philosophy degree from a private university at $200K? Probably bad debt. A car loan at 3% when you need reliable transportation for work? Probably fine. Context matters.

The key question before taking on any debt: "Will this money come back to me -- with friends?" If the answer is yes, and the interest rate is reasonable, it might be worth it. If the answer is "no, but I really want it," that's your signal to wait.

Not all debt is the enemy. But the wrong debt, at the wrong interest rate, for the wrong reasons? That's a trap with a welcome mat.