The word “debt” generally has an icky ring to it, right?
Not All Debt is Created Equal
But wait; not all debt in a individual’s financial situation is created equal. Just because you are carrying balances doesn’t mean it’s all bad.
There are actually two types. As a woman navigating financial independence, it’s crucial to know how to differentiate between the two.
Financial Goals: Let’s Get In the Right Mindset
First things first, don’t beat yourself up. You are here and reading this article.
Also, you are not alone. According to the U.S. government accountability office, Americans hold credit card balances of over $1 trillion.
You are already on your way to taking control. Personal finance is a journey. It all starts with a plan to pay it off.
If you have bad debt, you are NOT a bad person.
In this blog post, we’re going to break down the difference.
First the bad, then the good.
Bad Debt: What Is It?
When you are looking to manage debt, it is not just about having too much.
As its name suggests, it negatively impacts your financial health. It is typically defined as debt incurred to purchase depreciating assets or things that do not generate long-term income or increase in value.
This can often include credit card balances from unnecessary shopping, high-interest payday loans, or even auto loans.
The defining characteristic is that it not only creates a financial burden, but it also doesn’t contribute to improving your financial future.
Think about making monthly payments on the high interest credit card you bought Christian Louboutins with that now hurt your feet too much to wear.
The high-interest rate attached to these types of debt can make them difficult to pay off, leading to a cycle that can severely affect one’s financial stability.
Good Debt: What Is It?
This is a type of debt that can actually benefit you in the long run. Sounds crazy, right?
Some examples include educational loans like federal student loans, mortgages, or small business loans.
Needs vs. Wants
It’s also important to differentiate between needs and wants. This is a hard one, we know. But if you can stick to buying things that you actually need versus just want, you’ll be saving yourself a lot of grief in the long run.
When you need something, it’s okay to take out debt for it.
However, if something is truly an emergency, it should be paid with cash from your emergency fund, where you have saved 6-9 months of expenses.
When you want something, take a deep breath and ask yourself, “can I live without it?.”
Spoiler alert: you probably can.
Paying Off Balances
Lastly, it’s always a good idea to have a plan for paying off your balances. Whether it’s creating a budget or working with a professional financial planner, having a plan for tackling your debt will make it easier to stick to your goals.
We get into different options for paying off balances in this blog post about achieving your financial goals.
Financial freedom is a journey, and it’s important to remind yourself that you’re making progress, even if it’s slow. Remember, Rome wasn’t built in a day.
What Now?
Understanding the difference between types of debt is a crucial step to developing healthy financial habits.
It’s easy to fall into the trap of using credit cards or personal loans to buy things we don’t actually need, but in the long run, this is just costing us money.
As women, it’s important to have financial independence. Educating ourselves about personal finance topics like these puts us in the driver’s seat.
Your future self will thank you.
