Debt is money that you borrow and have to pay back, usually with interest. Debt can be good if it helps you buy important things like a house or an education, but it can be bad if you borrow too much and struggle to pay it back.
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This video explains the fundamental nature of debt, distinguishing between \"good debt\" and \"bad debt.\" It emphasizes that while borrowing can be a strategic tool for investment and growth, using debt for non-essential consumption can lead to severe financial stress, a cycle of unpaid balances, and long-term instability.
So let's talk a little bit about debt.
Debt is just the amount of money that you owe,
usually in the form of loans.
It could also be your balance on a credit card,
which is really a loan from the credit card issuer.
And I would say there is good debt and there is bad debt.
Good debt is when you borrow money
in order to make an investment of some kind
that should produce more money
than the amount that you are borrowing
and enough money to actually even offset the interest
that you're going to have to pay on that debt.
Examples of things that might be good debt
is if you are borrowing money to, say, buy a house
because that will reduce your rent expense in the future
and the house itself might appreciate.
Maybe you need transportation.
You need a car or a motorcycle to get to your job
or you could get to a better job if you had that.
You could work more hours
because you're gonna spend less time getting there.
That could be an investment.
It could be you're going to invest in yourself.
It could be saying, hey, I could take a course
or I could get a degree.
And yes, it's going to cost money
that I'm gonna have to pay interest on
on top of the money I owe,
but it'll increase my actual job prospects
and my income enough that will more than offset
that money that I have to pay in the future.
And even in those three scenarios,
three or four scenarios, be very, very careful.
If you're taking on student debt, really talk to people.
Make sure that the degree program you're getting into,
that line of work that you're getting into,
that the folks who decided to take debt on to do that,
that it actually did pay off.
If you buy a car, make sure that it's something
that really is an investment and not just something fancy
that you wanna show off to your friends
because at some point, yes, it is transportation,
but if you're starting to buy a very fancy car
and you're borrowing money to do it,
well, that the fanciness of the car
isn't going to necessarily increase your ability
to get to work or to get a better job.
And then you're essentially taking on debt for a want
as opposed to a need or an investment.
Same thing with buying a house.
It's not always the right decision.
Oftentimes it can be.
But really weigh what you think is going to happen,
how much rent you're going to save,
how much the house might appreciate,
and sometimes they go down in value too
relative to how much you owe
and make sure that it's something
that you will be able to pay back over time.
Even if some bad things happen in life, you lose a job,
you have to spend money on an emergency
in some way, shape, or form.
Now, on the other hand,
there's things that I would categorize as bad debt.
And this is when you are borrowing money
for things that, frankly, you do not need.
Because when you do that,
you're essentially taking money away from your future self.
And if you didn't have money today to buy it,
and if you're going to have to pay that money
back in the future with interest,
you're putting your future self
in a more and more difficult situation.
So I would say a very obvious category of this is,
let's say there's a big, fancy outfit you wanna buy,
one that will not help you get a job,
and you're like, well, I don't have the money,
but it looks really cool, let me buy that.
Well, it might feel good now,
but you're going to be paying that down
for a very, very, very long time.
Or using debt to go eat at a fancy restaurant
if you're using money that you don't have.
Once again, it might be fun in the moment,
but you're going to be paying that down
and taking away from your future self.
And it can lead to some pretty suboptimal
or not so great situations.
There are folks that, if they start doing that,
they take money from their future self,
they see that their income,
after they have to pay down the debt
and the interest and the payments,
month after month, their income starts going
lower and lower and lower and lower.
That's a scary situation to be in
that will create a lot of stress
and create a lot of anxiety.
If you find yourself in a situation
where you're borrowing to pay off other debt,
that can also be a very big red flag,
create a lot of stress and a lot of anxiety.
If on things like your credit cards,
you're just paying the minimum amount,
but the balances aren't coming down,
and you're usually paying very high interest
on those credit cards, that is a very bad situation
that is setting you up for not good financial outcomes.
And maybe worse of all, whenever someone
falls into one of these cycles,
they might just say, oh, I just want to look at it.
It just stresses me out.
And then you're not even in a position
where you're paying your debt or you're trying to ignore it,
and then that's going to hit your credit rating,
and eventually the collections folks
are gonna come after you,
and that is a very, very bad situation.
Maybe you have to declare bankruptcy
at some point in the future.
So debt can be useful,
but be very, very, very careful with it.
