Our financial system gives us ready access to a multitude of credit cards, as well as mortgage, auto, student, and personal loans. Each of these forms of debt is an obligation with potentially serious downsides, including the risk of financial distress, bankruptcy, and damage to our personal and professional reputation.
While all debt comes with obligations, we distinguish between “good” and “bad” debt. Good debt is money borrowed to create more value or accumulate more assets in future. Examples are borrowing to buy real estate as an investment or to attend school and command a higher salary in future. Bad debt refers to money we borrow and spend without a commensurate return.
Examples are a personal loan we use to go on an unnecessarily lengthy and expensive vacation or to finance the purchase of an expensive car which strains our budget and delays our repayment of high interest student loans.
It is imperative that you minimize debt, in general, and that you avoid bad debt altogether.