Learn About Debt with HCR Wealth Advisors

HCR Wealth Advisors is interested in seeing everyone have more success with their personal finances. In service of that goal, financial education can go a long way. That is why HCR Wealth is looking to give you a crash course in good and bad debt.

What Is Good Debt?

There are many takes on the concept of good debt. Rather than go through them all, a simplified definition can suffice. Good debt is affordable debt that ultimately leads to greater wealth. This can happen in a lot of ways, so a few examples might help.

A mortgage is usually considered a good debt (provided it’s an affordable mortgage). The idea is that rent payments are lost money. You pay the bill and never see those dollars again. When you pay a mortgage, a significant part of that money goes towards building equity. The house you get in the deal is worth a lot of money (and it can appreciate), so you’re building wealth with your housing payments.

A car loan can also be good debt. Even though the car loses value, for most people, it’s a means to get to work. If that’s the case, the money you might pay on your car loan ultimately helps you make more money by making you employable.

Student loans are a third example. Money paid for school is lost money, but a higher education should improve your employment and income opportunities, so it’s a money-making investment.

What Is Bad Debt?

There are two kinds of bad debt. The first is any debt you can’t afford. It doesn’t matter if you’re building equity if your mortgage payment is 80 percent of your income. That leaves you with too little money for living necessities.

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That said, there are affordable debts that are still bad. To understand this, it helps to define discretionary spending. This is a term for any purchase that isn’t a real necessity. Going to a movie, upgrading your smartphone when the old one works fine, and vacations are all forms of discretionary spending.

Here’s the thing. You can spend your money however you want. Discretionary spending, by itself, is not a problem. The problem is going into debt for discretionary purchases. If you pay even one cent in interest for this kind of spending, you’re accruing bad debt.

This article is provided for informational purposes only and should not be interpreted as investment advice.

HCR Wealth Advisors is interested in seeing everyone have more success with their personal finances. In service of that goal, financial education can go a long way. That is why HCR Wealth is looking to give you a crash course in good and bad debt.

What Is Good Debt?

There are many takes on the concept of good debt. Rather than go through them all, a simplified definition can suffice. Good debt is affordable debt that ultimately leads to greater wealth. This can happen in a lot of ways, so a few examples might help.

A mortgage is usually considered a good debt (provided it’s an affordable mortgage). The idea is that rent payments are lost money. You pay the bill and never see those dollars again. When you pay a mortgage, a significant part of that money goes towards building equity. The house you get in the deal is worth a lot of money (and it can appreciate), so you’re building wealth with your housing payments.

A car loan can also be good debt. Even though the car loses value, for most people, it’s a means to get to work. If that’s the case, the money you might pay on your car loan ultimately helps you make more money by making you employable.

Student loans are a third example. Money paid for school is lost money, but a higher education should improve your employment and income opportunities, so it’s a money-making investment.

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