By M Katie Helle, CPA

While many of us would prefer to live debt free, it is not always possible and perhaps may not be very smart.  Most people do not earn enough to pay for important purchases.  When determining if it is necessary to incur debt, it is important to understand the difference between good and bad debt.

Good debt is often considered an investment that will grow in value.  Take student loan debt for example.  Individuals take out student loans to assist with the cost of a college education.  A college education typically increases your value as an employee which in turn increases your future income – growth and added value.

Bad debt is incurred when you make purchases that lose their value quickly.  Let’s say you head to the store and find an outfit you cannot resist to purchase.  The ensemble costs $150.  You use your credit card to make the purchase.  When it comes time to pay the card, do you not have enough money to pay the balance in full.  The outfit will end up costing you far greater than $150 depending on how long it takes you to pay off the debt, which does not add value to the outfit.  A good rule of thumb is to not make a purchase like this if you do not have the cash to pay for it.

When it does come time for you to consider debt, it’s important to remember the true reason you are acquiring the debt it and ask yourself if it is an investment that will grow.