Do you know the difference between good and bad debt? Laura explains why it's a critical concept for saving money, building wealth, and creating more financial security. Plus, she covers a simple 7-step plan for paying off debt fast.

19 minute read

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Hey everybody. And welcome back to the money girl podcast. My name is Laura Adams and I’m a money and small business expert and author. Who’s been hosting the show since 2008. The mission here is to help you get the knowledge and motivation to prioritize your finances, build wealth and have more secure and less stress. Every show is like a mini training designed to help you come away with practical advice and tips that will help you make better money decisions and take your financial life to the next level. I want you to subscribe to the show so you make sure you never miss a weekly episode, and I would love your participation. You can send your money question or comment. A great way to do that is by calling our voicemail line. The number is 3 0 2 3 6 4 0 3 0 8. You can also email me using my contact page, Laura D adams.com or connect with me on Instagram at Laura D. Adams.

And as always, if you wanna read a companion blog post for this show or any show they’re published every week in the money girl [email protected] today’s episode is number 708 called good debt versus bad debt. Your plan for are paying off debt faster. I get a lot of questions about debt and specifically which debts should I pay off in which order and how do I tackle it? So today’s show is hopefully gonna give you a little bit of a, a framework to think about your debt. Uh, I think a lot of people believe it debt is bad and that you should just avoid debt altogether or pay it down as quickly as possible. And I’m certainly a proponent of that. However, we wanna think about debt in two different types, good and bad just to make it really simple. And it’s essential to understand their differences so that you can stay away from bad debt as much as possible and leverage good debt when it can help you.

So that’s what today’s show is all about. We’re gonna cover the differences between good and bad debt. I’m gonna give you some practical examples. Plus I’ll cover seven simple steps for paying off your debt as quickly as possible. Understanding these concepts will help you save money, build your net worth over time and ultimately create more financial security for the future. One way to know if a debt is good or bad is to ask yourself if it is for something that will appreciate or depreciate over time. If you use debt to finance an asset that can or should increase in value, it’s typically a good debt and a debt that finances, something that loses value is a terrible debt. So we want us stay away from those and, and we’ll get into more detail about, you know, what I’m talking about and how to differentiate them, but good debt is good because it can increase your net worth or your wealth over time.

A really good example of this is a home mortgage that allows you to purchase an asset that typically appreciates over time. Now there’s no guarantee that every piece of property that you purchase is going to be worth more in the future than it is today. But in general, real estate is a very good investment because it appreciates about three to 5% per year. And this year in 2021, there are parts of the country that have seen and prices rise over 20%. So it certainly depends on where you live and the features of the property plus mortgage rates are at historic lows, which makes them one of the least expensive debts to repay and a certain amount of interest that you pay on mortgages and home equity loans, and life of credit is tax deductible. So that makes them cost even less on an after tax basis.

So the combination of all these benefits makes getting a home mortgage for an affordable home. One of the best possible debts that you can have, again, it’s gotta be for an affordable home. I’m not saying go out and get, you know, a multi million mortgage, if that is not within your budget. Another good debt to think about is a loan for college education. Now I know that student loan debt kind of gets a bad rap right now, especially because there is a huge amount of student loan debt out there. And you know, I’m not saying that you want to, to overdo it with student loan debt. Um, the thing about student loan debt is that it’s not backed by an asset. Like a mortgage is backed by your home and a car loan is backed by your car. So it’s an unsecured debt. The thing about student loan debt is that it can definitely help you earn more over your lifetime.

And studies have shown that people with college degrees earn more than folks, you know, on average with high school degrees or high school diplomas. And those with advanced college degrees can earn more than those with just undergraduate college degrees. Now this is not going to be true for everyone. I know plenty of people who didn’t go to college, who are doing just fine financially, but when we look at averages, you know, this tends to be the case. And of course a college degree is required for many jobs and in many industries such as healthcare law or, or computer engineering. So depending on the career you want taking out a reasonable amount of education, debt can make you more employable and can definitely increase your earnings, your income over your lifetime. Plus some amount of interest that you pay on education loans is tax deductible. You do don’t get too deducted as much as you do with a mortgage.

However, every little bit helps a really good rule of thumb is to limit your student loan debt to your expected annual salary right after graduation. So let’s say you believe you’re gonna earn $80,000 in your first year as a register nurse. You might consider borrowing no more than $80,000 for your entire education. And this is gonna vary depending on the career you go into. I know, you know, a lot of doctors and attorneys that have to pay, uh, a lot more than $80,000 for their education, but they can’t afford to repay it because they’re going to, you know, very high salaries eventually, you know, they may not make it in, in their first year. Let’s say when they’re doing an internship as a physician, but they can see their earning potential increase significantly over time. So let’s talk about bad debt. As I mentioned, bad debts finance items that lose you over time.

For example, a car loan allows you to buy a vehicle, but that vehicle will typically lose half its value within a few years. And of course, appreciation depends on the vehicle, make and model and how well you maintain it. So while a car loan is technically a bad debt at a lot of people need vehicles for their businesses to get to their jobs or just, you know, to handle everyday chores and living. So it’s wise to borrow as little as possible or to finance cars that will hold their value over time. I have always purchased used luxury vehicles because by the time I own, um, most of the depreciation has already occurred. So I’m buying it at a, a pretty steep discount. Cars are just one of those, you know, kind of necessary evils in life, even though they’re not great investments, we need them, right. We just can’t can’t get away with not having them in a lot of cases. So just finance vehicles, very cost.

Now, one bad debt that I think we can probably all agree on is credit cards. They’re one of the worst debts that you can have. Let me give you an example. Let’s say you rack up $1,500 on a credit card that charges 18% interest. If you spent the money on things like dinner with your friends, new clothes or a TV, those items have very little or no future value. And if you were to only make the cards minimum payment, it would take you about five years to pay off that balance. And you’d pay almost a thousand dollars in interest on those purchases. And the stuff that you bought with a card would literally be worth pennies on the dollar. So credit card debt or consumer debt as we call it, you know, is really a, a very losing proposition. That’s this is why I always recommend that if you’re going to use a credit card and I do I’m.

So somebody that puts everything on a credit card, but I pay the card off in full every single month. And I use multiple cards so that I can leverage different cards for different types of purchases. But again, if you’re using cards responsibly and you’re not being charged any interest, then there’s no downside. But if you’re carrying a balance, your credit cards from month to month, you are probably paying very high rates of interest and that’s a bad debt. And of course, the downside of carrying a lot of debt is that it damages both your credit and your quality of life. You know, it really may be something that you, you know, can’t sleep at night because you’re thinking about how am I gonna pay off all this debt? This episode is supported by policy genius. If someone relies on your financial support, whether it’s a child aging parent, or even a business partner, you need life insurance.

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So now that we’ve talked about the differences between good debt and bad debt, I, I hope it will make you think a little bit more clearly about how to prioritize those debts. Uh, I wanna talk about the fastest way to pay them off, and I want you to start with the bad debt first. The good debt is not hurting you as much. In fact, it may even be helping you build your net worth over time. So when we talk about paying off debt, I wanna encourage you to always start with the bad debts, leave those good debts until the very last. So here are seven steps you can use to create a debt elimination plan. Number one, make a list of your debts, get this down either on paper or in a spreadsheet, make a list of everything that you owe. And if you haven’t done that already, it can be pretty eye opening.

If you know, you’re not staying on top of, of what you owe, make a list of all the debts, jot down the creditor, the interest rate you’re paying and the outstanding balance today, as I mentioned, get it all down in a spreadsheet, and then you can keep up with it and make an adjustments. As you pay down your debt. You also make a notation in the spreadsheet of the good debts, such as the mortgages student loans and low rate auto loans, and make a note of your bad debts, such as the credit cards, the high rate, personal loans, and high rate auto loans. Number two, choose a method to tackle your debt. There are various payoff strategies that you’ve probably heard about. I’m gonna cover the snowball method, the avalanche method and the landslide method. So what is the debt snowball method? This is paying off your debts in order of the smallest to the largest balances.

So this does not take interest rate into consideration at all. And this is a good method for anyone who wants to experience some small wins. So, you know, let’s say you’ve got a low rate student loan, but you’ve only got maybe $500 left on it. Like it’s your smallest balance that you owe, even though that’s a good debt to have. And it’s probably got a relatively low in interest rate. If you wanna go ahead and just knock that one out, pay it off. That would be using the debt snowball method. So again, that’s going in order of the smallest amount of money that you owe up to the largest balance that you owe. The next method is called the debt. Avalanche method is paying off your debts in order of the highest to lowest interest rate. So I really like this method because it saves you the most money in interest.

And that may allow you to pay off your principle, debt balances, even faster. So if you can save interest and then use that savings to pay off the debt, it can actually help you pay everything off faster. So for this method, you’re going to sort your debts from the highest interest rate down to the lowest interest rate and tackle them in that order. And finally, the debt landslide. This is paying off debts in order of the newest debt to the oldest debt. So if you recently had a credit card balance that you racked up, you might go ahead and tackle that one first, this method can help your credit because credit scoring models typically look at your most current transactions, giving them the most weight, uh, versus your older transactions. So if you just racked up a big credit card balance, for instance, getting that credit card balance down to no more than let’s say about 20 to 25% of your available credit will help your credit scores improve.

Now while these are common debt strategies, there really isn’t a right or wrong way to pay off debt. Any method that you can stick with and just make some steady progress with is gonna be a good method. However, I always recommend the avalanche method or starting with your highest rate debt again, because it saves you the most money over the long run. Plus, if you’re putting that savings back into your debt balance, it can help you reduce debt even faster. And since most people have high rate credit cards, that’s typically where you need to start. You wanna consider what is your most expensive credit card you might have? You know, if you’re like most people you’ve got multiple cards. So look at each card, what is the interest rate you’re being charged? Start with a card that is the most expensive with the highest interest rate, then move on to the next, most costly card.

And so on. Now, after you pay off your bad debts, then you can consider tackling the good ones unless you’ve got a better use for your money. And I would argue in a lot of cases, you probably do have a better use for your money. For instance, if you can invest your money for a higher rate of return than a debt’s interest rate, you’re usually better off investing. So let’s say you’ve got a 3% mortgage after you claim a tax deduction for a portion of the interest. Maybe that nets it down to 2.5%, 2.7, 5%, something like that. You can certainly invest your money and get a higher rate of return than two and a half or 2.7, 5%. So that’s what I mean by considering what’s the best use for your yes, paying off your mortgage is a fantastic goal, but let’s say, you know, you haven’t saved enough yet for retirement.

I would encourage you instead of paying off the mortgage first to use that extra money, you’ve got to invest for the future. All right, step number three, pay more than the minimum. So now that you’ve created a game plan for your debt and you know, which ones to tackle first, it’s time to throw everything you’ve got at that one debt while maintaining minimum payments on your other debts. And then once you pay off that first debt, you wanna take all the money you were throwing at it and put it toward your next and then rinse and repeat this process until you’re debt free. Step number four, create a budget. So creating a budget or a spending plan is always important, but it is critical when you’re trying to get, you know, aggressive about paying off your debt, because there’s no way to know how much money you’ve got to put toward those extra payments each month, unless you’ve really analyzed your budget and cut back where you can.

So I would start by listing out your income and expenses in a simple spreadsheet, or you can use a budgeting tool that auto makes the process. I’ve done a lot of shows, talking about tools, uh, things like Quicken, maybe mint. There are a lot of different personal finance, a apps out there that allow you to create budgets and analyze your spending. So try some different budgeting methods until you find a system that works for you. Step number five, look for ways to increase your cashflow. Everyone wants to pay off their debt as quickly as possible. And an excellent way to do that is to either increase your income, cut your expenses or both. So once you’ve established your budget or your spending plan, look for ways to aggressively cut back on your expenses. So you can free up more cash that you can put toward your debt.

You might reduce spending on variable expenses like dining out clothes or subscription services. Also, you might consider shopping around for less expensive car insurance or a cheaper phone plan. You know, really looking at a, all the services you’re paying for. And maybe you can even start a side hustle to increase your income so that you can pay off debt faster. Step number six, consider a balance transfer offer. If you’ve got multiple credit cards or high rate loans using a balance transfer credit card may make sense. They typically charge 0% interest during a promotional period, such as 12, or maybe up to 18 months. This strategy can drastically cut your interest expense. However, if you don’t pay off the balance by the end of the promotion, your interest rate could end up being higher than it was before you, you made the transfer. So you wanna read the fine print carefully and understand, you know, what the benefits are.

You know, the idea with the balance transfer is that while you’re not getting charged any interest, you’re going to be saving money that you can then be putting toward the debt. So paying, you know, increasing the payments toward the debt so that you can get out of debt faster and step number seven, celebrate small wins. Paying off debt is a marathon, not a sprint. You’ve got to really keep yourself motivated. You wanna prevent fatigue and burnout by celebrating all your little small wins along the way. For example, if you $5,000 debt to pay down, break that up into $500 mini goals. So each time you pay off $500, you might treat yourself to something you enjoy. That way you can enjoy life while you’re paying down your debt. All right, we’ll end the show with some of your questions. I got one from Elizabeth from the evergreen state.

She says, good news. After listening loyally to your podcast, you have inspired me to invest. I’m 35 years old and work full time at a local municipality. I already have a retirement account, an emergency fund, and I’m in the process of setting up an HSA. I’m very financially responsible and have never paid interest on any of my credit cards. As I do not spend above my means. I’m finally ready to open a brokerage account. Thanks to you. This is very new to me that said, I wanna choose my own ETFs index funds and stocks and have monthly automatic transfers from my checking into the brokerage account. One platform I considered requires you to automatically transfer $100 each month, but I’m not ready to invest that much monthly. Can you recommend a platform with very low fees and minimum ongoing transfers? Elizabeth, thank you so much for your email.

And I am so thrilled that you are doing so well with your finances. And, you know, you say that you’ve never invested, but you actually are investing through your retirement account. So you’re not brand new to it. You’re just really kind of branching out here. So I would say, first of all, if you are not maxing out your retirement account, I would do that first. So, you know, if you’re to the point where you are maxing out the account, then that’s when I would go and open up a brokerage account, the, the brokerage account will be a taxable account. So the gains that you make in the account will taxable, and there are a lot of platforms that don’t have any monthly automatic requirements. So I would just shop around one of my favorite investing platforms that I’ve used for decades is betterment. Um, I really just like their platform.

I think they’ve, you know, just got a really nice user interface. Um, I think the fees are quite reasonable. So Elizabeth, I would check that out. Um, and you know, there are plenty of options out there, so good luck with that. And, uh, let me know how it goes. I got another question from Jason N who says, Hey, Laura, one of your biggest fans here, I just heard your most recent podcast on currency. I’ve been investing in the space since the summer. I’m wondering if you personally invest in crypto and if so, which coins do you hold in your personal portfolio? Thanks, Jason, thank you so much for your kind words. Yes, I am a crypto enthusiast and, you know, I would say to think cryptocurrency as a part of a diversified portfolio. So, you know, maybe if it’s something that you really wanna get into, you might limit it to, let’s say 10% of your overall portfolio, or maybe if you, you know, really wanna do more, you could go 15%, maybe up to 20%, but for most people, I would say dipping your toes in a little bit and going five to 10%, you know, is probably a good, a good limit.

And for what I hold, I’ve got really a variety of coins, uh, probably mostly bit Bitcoin. Um, I’ve also got a bit of Ethereum Solana, um, you know, and just a variety of, of coins, um, in smaller amounts. But I would say the, the majority of what I own right now is, uh, is Bitcoin. So again, part of a diversified portfolio, you know, if you’re comfortable with them, make sure the, you do some homework, you know, and that you understand, um, the technology that you, you know, feel comfortable with it, you should never invest in anything that you don’t understand or that you don’t feel comfortable with. Um, so I’ll be doing more shows about cryptocurrency as it becoming a pretty hot topic. And, and I wanna make sure you all understand the space. Um, so Jason, thanks again. And, and we’ll be talking more about cryptocurrency soon.

All right, before I let you go, I wanna encourage you to join my free private Facebook group called dominate your dollars. It’s a fantastic group of folks. They’re asking awesome questions, helping each other and reaching their financial goals. So again, just search for dominate your dollars when you’re on Facebook and you can also visit Laura D adams.com where you’ll find my contact page and more about me, my books and online courses. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is a quick and dirty tips podcast. It’s audio engineered by Steve Ricky bird with editing by Adam Cecil. Our operations and editorial manager is Michelle Marus. Our assistant manager is Emily Miller and our marketing and publicity assistant is

Many people think that all debt is bad and should be avoided or paid down as quickly as possible. However, you should break down debt into two types: good and bad. It’s essential to understand their differences so you stay away from bad debt as much as possible and leverage good debt when it can help you.

This post will cover the differences between good and bad debt and some practical examples. Plus, I’ll review seven simple steps for paying off your debt as quickly as possible. Understanding these concepts will help you save money, build your net worth, and create more financial security for the future.

Examples of good debt

One way to know if a debt is good or bad is to ask yourself if it pays for something that will appreciate or depreciate over time. If you use debt to finance an asset that can or should increase in value, it’s typically good. And debt that finances something that loses value is terrible.

Good debt is good because it can increase your net worth or wealth over time. One example is a home mortgage, which allows you to purchase an asset that typically appreciates over time. While there’s no guarantee that your home will be worth more in five years than today, in general, real estate appreciates about 3% to 5% per year.

In 2021, there are parts of the country that have seen home prices rise 20%! But it depends on where you live and the features of your property. Plus, mortgage rates are at historic lows, making them one of the least inexpensive debts to repay.

A certain amount of interest you pay on mortgages and home equity loans is tax-deductible, making them cost even less on an after-tax basis. The combination of benefits makes getting a mortgage for an affordable home one of the best possible debts.

Another good debt is a loan for a college education. While a student loan isn’t backed by an asset, such as a home, it can help you earn more over your lifetime. A college degree is required for many jobs and industries, such as health care, law, and computer engineering. So, depending on the career you want, taking out a reasonable amount of education debt can make you more employable. Plus, some amount of interest paid on education loans is tax-deductible.

A good rule of thumb is to limit your student loans to your expected annual salary after graduation. For instance, if you believe that you’ll earn $80,000 in your first year as a registered nurse, consider borrowing no more than $80,000 for your education.

Examples of bad debt

As I mentioned, bad debts finance items that lose value over time. For example, a car loan allows you to buy a vehicle, which typically loses half its value within a few years. Of course, the depreciation rate depends on a vehicle’s make and model and how well it’s maintained.

While a car loan is bad debt, many people need vehicles for their businesses, jobs, or to handle everyday chores. So it’s wise to borrow as little as possible or finance cars that hold their values over time.

Credit cards are one of the worst debts you can have. For instance, let’s say you rack up a $1,500 balance on a card charging 18% interest. If you spent the money on dinner with friends, new clothes, and a TV, those items have no or very little future value.

If you only make the card’s minimum payment, it would take you about five years to pay off, and you’d pay almost $1,000 in interest! And the stuff you bought with the card would be worth pennies on the dollar.

How to pay off debt faster

Carrying a lot of debt damages both your credit scores and quality of life. Now that you know the difference between good debt and bad debt, what’s the fastest way to pay it off?

Use these steps to create a debt elimination plan:

1. Make a list of your debts.

Knowing how much money you owe is the first step to paying it off. If you haven’t already, make a list of your debts, their interest rates, and balances. Put it all in a spreadsheet or write it down on paper.

Identify your good debts, such as mortgages, student loans, and low-rate auto loans, and your bad debts, such as credit cards, high-rate personal loans, and high-rate auto loans.

2. Choose a method to tackle your debts.

Some debt payoff strategies include the snowball, avalanche, and landslide methods.

  • Debt snowball is paying off debts in order of the smallest to largest balances. It’s an excellent method for anyone who wants to experience some small wins.
  • Debt avalanche is paying off debts in order of the highest to lowest interest rates. This method saves you the most interest, which may allow you to pay off your principal debt balances faster.
  • Debt landslide is paying off debts in order of newest to oldest. This method can help you improve your credit while you whittle down your debt.

While these are common debt elimination strategies, there isn’t a right or wrong way to pay off debt. Any method you can stick with and make steady progress will be a good one.

However, I always recommend the avalanche method or starting with your highest-rate debt because it saves you the most money over the long run. Plus, if you plow your savings back into your debt balance, you can reduce it faster. Since most people have high-rate credit cards, consider starting with your most expensive card and then moving to the next most costly card or loan you have.

After you pay off your bad debts, then you can consider tackling the good ones—unless you have a better use for your money. For instance, if you can invest your money for a higher rate of return than a debt’s interest rate, you’re usually better off investing instead.

3. Pay more than the minimum.

Now that you’ve created a game plan for your debt and know which one to tackle first, it’s time to throw everything you’ve got at it while making minimum payments on your other debts.

Once you pay off that first debt, take all the money you were throwing at it and put it towards your next debt. Rinse and repeat this process until you’re debt-free.

Not sure how much extra money you can put toward your debt each month? Keep reading.

4. Create a budget.

Creating a budget or a spending plan is always important, but it’s critical when you’re paying off debt. There’s no way to know how much money you have to put toward extra payments each month without one.

You can start by listing your income and expenses in a simple spreadsheet. Or, you can use a budgeting tool that automates the process. Try different budgeting methods until you find a system that works for you.

5. Look for ways to increase your cash flow.

Everyone wants to pay off their debt as quickly as possible. An excellent way to get out of debt faster is to increase your income, cut your expenses, or both. So, once you’ve established your budget or spending plan, look for ways to trim your expenses and free up more cash.

You might reduce spending on dining out, clothes, or subscription services. Also, shop around for cheaper car insurance, phone coverage, and internet service. Maybe you can start a side hustle to pay off debt.

6. Consider a balance transfer offer.

If you have multiple credit cards or high-rate loans, using a balance transfer credit card may make sense. They typically charge 0% interest during a promotional period, such as 12 to 18 months. This strategy can drastically cut your interest expense. However, if you don’t pay off your balance by the end of the promotion, your interest rate could end up being higher than before you made the transfer.

7. Celebrate small wins!

Paying off debt is a marathon, not a sprint. Prevent fatigue and burnout by celebrating small wins along the way. For example, if you have a $5,000 debt to pay down, break it up into $500 mini-goals. Each time you pay off $500, treat yourself to something you enjoy, like a morning latte or a bottle of wine. That way, you can enjoy life along the way.

This article originally appeared on Quick and Dirty Tips

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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