Debt is a tool used by individuals, businesses, and even governments to make large purchases and projects happen. Debt can make your home-buying dreams a reality and give you the power to buy a car, even if you don’t have tens of thousands of dollars in the bank. But many Americans find themselves drowning in debt. Parents juggling payments for loans, mortgages, and college education want to help their kids learn how to handle debt responsibly. Understanding the difference between good debt and bad debt is key when teaching kids about financial literacy and making wise choices with money.
Why is debt bad?
Spending money wisely is about making the best decisions for your unique financial situation. Debt might be good for one person, but bad for another. Some of the best factors to consider if a debt will be good or bad for your finances are:
- Wants vs. needs. Some debts can help you achieve goals like buying a house or getting a college degree. Other debts, like impulse purchases on a credit card, fall into the “wants” category. How important is this debt to you?
- Value. Debts are generally considered bad if you’re borrowing money for things that go down in value, like clothes or a car, instead of building value over time.
- Payments. If you can’t afford to make payments on a debt, it’s bad debt. Teach kids about money and the importance of paying a debt back. Help them practice managing money with a kids debit card and show them how payments limit the amount of money they can use for wants in the future.
- Interest rate. Another bad debt factor is how much you’ll pay in interest and fees to borrow money. High-interest rates mean you’ll pay more for something over time.
What is good debt?
Good debts help you buy assets that put you in a better financial position. Good debts act more like investments, like buying a house. Good debts go up in value or help you achieve your financial goals. A college degree could help you land the career of your dreams, and earn your investment money back with a higher paycheck. When you use good debt responsibly and practice spending money wisely, you can build your credit and wealth over time.
Good debt vs. bad debt
When you evaluate your debt decisions, ask yourself what the debt does for your life. Kids and adults can benefit from spending money wisely and learning to prioritize their needs and wants when making money choices. Teaching your child about good and bad debt starts with showing them how to make smart money decisions with their long-term goals in mind. Kids can practice managing money with a kids debit card while learning more about financial literacy in everyday life. Early financial education is key to helping your child develop smart spending habits for life.