Good debt is money owed for things that can help build wealth or increase income over time. This includes student loans, mortgages, or business loan. Bad debt are things like credit cards or other consumer debt that do little to improve your financial outcome. It is important to use good debt to your advantage and we listed out all the options below!
A good rule of thumb is you should not borrow more than what you expect to earn in your first year on the job. All education programs differ in price and some are a lot more expensive to earn. If you are pursuing your master’s degree in education and the starting salary is $65,000, then you should not take out more than $65,000 in loans. As your salary increases over the years, that should help with the interest that accrues over time.
Of course, you cannot predict an economic downturn upon graduation, so it is important to minimize debt earlier on. COVID -19 created challenges for recent grads trying to land their first position upon graduation.
Mortgage debt has been considered the safest forms for good debt being that each monthly mortgage payment builds equity in your home. However, with an economic downturn, prices of homes do not rise and using mortgage terms you do not fully understand can create a significant risk. Borrowers who have a loan with an adjustable rate, known as ARM, saw an increase in their loan payments and lost their homes to foreclosure during the mortgage crisis.
Experts say that your monthly mortgage payment should be less than 28% of your gross monthly income. It is also important to know all the conditions of having an ARM on your loan due to benefits in the beginning but higher monthly payments down the road.
After you factor out principle repayment, you must calculate interest payments. At this point, does the debt still make sense? This should help you determine if the debt is more beneficial than burdensome.
The key is what does the debt do you for you – and it should always be more than what you do for the debt.
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