by
Garrett Clark
Debt Management
Good Debt vs. Bad Debt: Know the Difference
When it comes to money, one word tends to make people uneasy: debt. For many, debt carries a negative connotation, often tied to financial stress, high-interest credit cards, or overwhelming student loans. But in the world of personal finance, not all debt is created equal. In fact, some debt can be used strategically to grow wealth, expand opportunities, and improve your financial future—if you understand how to use it.
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The key is knowing the difference between good debt and bad debt. When used wisely, good debt can be a stepping stone toward financial independence. But if misused or misunderstood, bad debt can become a major obstacle. This guide breaks down the differences, gives examples of each, and helps you understand how to use debt to your advantage.
What Is Good Debt?
Good debt is money borrowed to acquire something that is expected to increase in value or generate future income. It’s typically used for long-term investments in yourself or your business, and it helps improve your financial position over time.
In other words, good debt is productive. It supports your ability to build wealth and typically offers a return on investment that justifies the cost of borrowing.
Examples of Good Debt:
Mortgage loans: Buying a home, rental property, or other real estate assets can build equity, appreciate, and generate income.
Student loans: When used for a degree or certification that increases your earning power.
Business loans: Funds that help start or expand a profitable business, especially when you have a solid business plan.
Retirement plan investments: Like using a Solo 401(k) to invest in real estate or other alternative assets.
Personal loans for productive purposes: Such as financing a home renovation that adds value or consolidating higher-interest debts.
Good debt usually has lower interest rates, offers favorable repayment terms, and is tied to an asset or skill that will benefit you in the future.
What Is Bad Debt?
Bad debt is money borrowed to buy something that loses value or doesn’t provide any real financial return. It’s often driven by emotional or impulsive decisions and results in high interest payments for items that don’t improve your wealth or lifestyle over time.
Bad debt is consumptive, meaning it doesn’t generate income or increase your net worth—instead, it weighs down your financial progress.
Examples of Bad Debt:
Credit card debt: Especially for discretionary purchases like clothes, electronics, entertainment, or dining out.
Auto loans on luxury or depreciating vehicles: Vehicles lose value quickly, and paying interest on something that drops in value is rarely a good move.
Personal loans for non-essential expenses: Like vacations or impulse purchases.
Buy Now, Pay Later plans: These often disguise long-term obligations with short-term convenience.
Payday loans: Extremely high-interest loans that can trap borrowers in a cycle of debt.
Bad debt typically comes with high interest rates, short repayment periods, and little to no return.
How to Tell the Difference
Sometimes debt isn’t good or bad—it depends on how it’s used. Before taking on any debt, ask yourself these questions:
Will this purchase increase in value or generate income?
Is the interest rate reasonable for the benefit I’ll gain?
Will this help me reach a financial goal or hold me back?
Do I have a solid plan to repay this debt?
Am I borrowing out of necessity or convenience?
If your answers lean toward long-term value, strategic purpose, and reasonable risk, the debt is more likely to be good.
If you’re borrowing to fund a lifestyle you can’t afford or to satisfy short-term desires, you may be entering bad debt territory.
The key is knowing the difference between good debt and bad debt. When used wisely, good debt can be a stepping stone toward financial independence. But if misused or misunderstood, bad debt can become a major obstacle. This guide breaks down the differences, gives examples of each, and helps you understand how to use debt to your advantage.
What Is Good Debt?
Good debt is money borrowed to acquire something that is expected to increase in value or generate future income. It’s typically used for long-term investments in yourself or your business, and it helps improve your financial position over time.
In other words, good debt is productive. It supports your ability to build wealth and typically offers a return on investment that justifies the cost of borrowing.
Examples of Good Debt:
Mortgage loans: Buying a home, rental property, or other real estate assets can build equity, appreciate, and generate income.
Student loans: When used for a degree or certification that increases your earning power.
Business loans: Funds that help start or expand a profitable business, especially when you have a solid business plan.
Retirement plan investments: Like using a Solo 401(k) to invest in real estate or other alternative assets.
Personal loans for productive purposes: Such as financing a home renovation that adds value or consolidating higher-interest debts.
Good debt usually has lower interest rates, offers favorable repayment terms, and is tied to an asset or skill that will benefit you in the future.
What Is Bad Debt?
Bad debt is money borrowed to buy something that loses value or doesn’t provide any real financial return. It’s often driven by emotional or impulsive decisions and results in high interest payments for items that don’t improve your wealth or lifestyle over time.
Bad debt is consumptive, meaning it doesn’t generate income or increase your net worth—instead, it weighs down your financial progress.
Examples of Bad Debt:
Credit card debt: Especially for discretionary purchases like clothes, electronics, entertainment, or dining out.
Auto loans on luxury or depreciating vehicles: Vehicles lose value quickly, and paying interest on something that drops in value is rarely a good move.
Personal loans for non-essential expenses: Like vacations or impulse purchases.
Buy Now, Pay Later plans: These often disguise long-term obligations with short-term convenience.
Payday loans: Extremely high-interest loans that can trap borrowers in a cycle of debt.
Bad debt typically comes with high interest rates, short repayment periods, and little to no return.
How to Tell the Difference
Sometimes debt isn’t good or bad—it depends on how it’s used. Before taking on any debt, ask yourself these questions:
Will this purchase increase in value or generate income?
Is the interest rate reasonable for the benefit I’ll gain?
Will this help me reach a financial goal or hold me back?
Do I have a solid plan to repay this debt?
Am I borrowing out of necessity or convenience?
If your answers lean toward long-term value, strategic purpose, and reasonable risk, the debt is more likely to be good.
If you’re borrowing to fund a lifestyle you can’t afford or to satisfy short-term desires, you may be entering bad debt territory.
“Debt isn’t the enemy—ignorance is. When used wisely, debt becomes a tool for building wealth, not a trap for losing it.”
Garrett Clark
Director of Sales
The Role of Good Debt in Building Wealth
Debt can be a powerful wealth-building tool if used wisely. Consider these scenarios:
Real Estate Investing
A mortgage on a rental property is a common example of good debt. Not only can the property appreciate, but it can also generate monthly cash flow through rent. If you use your Solo 401(k) to purchase the property, all the growth is tax-deferred or tax-free (if using the Roth portion), allowing you to build retirement wealth strategically.
Education and Career Growth
While student loans can sometimes be burdensome, they can also be an investment. A certification, trade license, or college degree can significantly increase lifetime earnings, especially when the loan is used efficiently and paid off responsibly.
Business Expansion
Small business loans can be a game-changer for entrepreneurs and self-employed professionals. If the loan helps increase profits, build clientele, or open new locations, it becomes a smart use of borrowed capital.
Solo 401(k) Personal Loan Option
One lesser-known benefit of the Solo 401(k) is the ability to take a personal loan from your account, up to $50,000 or 50% of the account value, whichever is less. Remodelers, for example, can use this to fund a project, bridge cash flow gaps, or handle an emergency. Since you’re borrowing from yourself and repaying yourself with interest, it’s a smarter way to access funds than using a high-interest credit card or personal loan.
Why Bad Debt Is So Dangerous
Bad debt doesn't just cost money—it limits your financial flexibility and creates long-term stress.
High interest compounds the problem: Credit cards with 20%+ interest rates can trap you in endless payments.
Your credit score suffers: Missed payments, high utilization, and defaults lower your creditworthiness.
Limits your future opportunities: High monthly debt payments reduce your ability to save, invest, or take out good debt for better opportunities.
Even worse, bad debt often snowballs—once you're in it, it becomes harder to escape without drastic changes.
Tips for Managing and Avoiding Bad Debt
Create a budget and stick to it
Know your numbers and set limits for non-essential spending.Use credit cards responsibly
Only charge what you can pay off each month and avoid carrying balances.Build an emergency fund
So you're not forced into high-interest debt when the unexpected happens.Live below your means
Focus on building assets, not appearances.Avoid financing depreciating assets
Don’t take out long-term loans for items that lose value quickly.
When Good Debt Turns Bad
Not all good debt stays good. If you overextend yourself or misuse borrowed funds, even the best debt can become a burden.
For example:
Buying a rental property without understanding the market or having reserves for repairs could lead to losses.
Taking out student loans for a degree with limited job prospects might result in high payments with little income.
Using a business loan for personal spending or unnecessary expansion can harm your company.
The line between good and bad debt often lies in your discipline and planning.
Debt as a Tool
Debt itself isn’t the problem—how you use it determines whether it helps or hurts your financial future. Good debt should provide long-term benefits, such as cash flow, appreciation, or improved earning power. Bad debt, on the other hand, drains your resources and keeps you stuck.
When in doubt, ask:
“Will this help me grow my income or wealth, or will it cost me more than it’s worth?”
By learning how to strategically manage debt, you can build a strong financial foundation, avoid costly mistakes, and move confidently toward financial independence.
The Role of Good Debt in Building Wealth
Debt can be a powerful wealth-building tool if used wisely. Consider these scenarios:
Real Estate Investing
A mortgage on a rental property is a common example of good debt. Not only can the property appreciate, but it can also generate monthly cash flow through rent. If you use your Solo 401(k) to purchase the property, all the growth is tax-deferred or tax-free (if using the Roth portion), allowing you to build retirement wealth strategically.
Education and Career Growth
While student loans can sometimes be burdensome, they can also be an investment. A certification, trade license, or college degree can significantly increase lifetime earnings, especially when the loan is used efficiently and paid off responsibly.
Business Expansion
Small business loans can be a game-changer for entrepreneurs and self-employed professionals. If the loan helps increase profits, build clientele, or open new locations, it becomes a smart use of borrowed capital.
Solo 401(k) Personal Loan Option
One lesser-known benefit of the Solo 401(k) is the ability to take a personal loan from your account, up to $50,000 or 50% of the account value, whichever is less. Remodelers, for example, can use this to fund a project, bridge cash flow gaps, or handle an emergency. Since you’re borrowing from yourself and repaying yourself with interest, it’s a smarter way to access funds than using a high-interest credit card or personal loan.
Why Bad Debt Is So Dangerous
Bad debt doesn't just cost money—it limits your financial flexibility and creates long-term stress.
High interest compounds the problem: Credit cards with 20%+ interest rates can trap you in endless payments.
Your credit score suffers: Missed payments, high utilization, and defaults lower your creditworthiness.
Limits your future opportunities: High monthly debt payments reduce your ability to save, invest, or take out good debt for better opportunities.
Even worse, bad debt often snowballs—once you're in it, it becomes harder to escape without drastic changes.
Tips for Managing and Avoiding Bad Debt
Create a budget and stick to it
Know your numbers and set limits for non-essential spending.Use credit cards responsibly
Only charge what you can pay off each month and avoid carrying balances.Build an emergency fund
So you're not forced into high-interest debt when the unexpected happens.Live below your means
Focus on building assets, not appearances.Avoid financing depreciating assets
Don’t take out long-term loans for items that lose value quickly.
When Good Debt Turns Bad
Not all good debt stays good. If you overextend yourself or misuse borrowed funds, even the best debt can become a burden.
For example:
Buying a rental property without understanding the market or having reserves for repairs could lead to losses.
Taking out student loans for a degree with limited job prospects might result in high payments with little income.
Using a business loan for personal spending or unnecessary expansion can harm your company.
The line between good and bad debt often lies in your discipline and planning.
Debt as a Tool
Debt itself isn’t the problem—how you use it determines whether it helps or hurts your financial future. Good debt should provide long-term benefits, such as cash flow, appreciation, or improved earning power. Bad debt, on the other hand, drains your resources and keeps you stuck.
When in doubt, ask:
“Will this help me grow my income or wealth, or will it cost me more than it’s worth?”
By learning how to strategically manage debt, you can build a strong financial foundation, avoid costly mistakes, and move confidently toward financial independence.
The key is knowing the difference between good debt and bad debt. When used wisely, good debt can be a stepping stone toward financial independence. But if misused or misunderstood, bad debt can become a major obstacle. This guide breaks down the differences, gives examples of each, and helps you understand how to use debt to your advantage.
What Is Good Debt?
Good debt is money borrowed to acquire something that is expected to increase in value or generate future income. It’s typically used for long-term investments in yourself or your business, and it helps improve your financial position over time.
In other words, good debt is productive. It supports your ability to build wealth and typically offers a return on investment that justifies the cost of borrowing.
Examples of Good Debt:
Mortgage loans: Buying a home, rental property, or other real estate assets can build equity, appreciate, and generate income.
Student loans: When used for a degree or certification that increases your earning power.
Business loans: Funds that help start or expand a profitable business, especially when you have a solid business plan.
Retirement plan investments: Like using a Solo 401(k) to invest in real estate or other alternative assets.
Personal loans for productive purposes: Such as financing a home renovation that adds value or consolidating higher-interest debts.
Good debt usually has lower interest rates, offers favorable repayment terms, and is tied to an asset or skill that will benefit you in the future.
What Is Bad Debt?
Bad debt is money borrowed to buy something that loses value or doesn’t provide any real financial return. It’s often driven by emotional or impulsive decisions and results in high interest payments for items that don’t improve your wealth or lifestyle over time.
Bad debt is consumptive, meaning it doesn’t generate income or increase your net worth—instead, it weighs down your financial progress.
Examples of Bad Debt:
Credit card debt: Especially for discretionary purchases like clothes, electronics, entertainment, or dining out.
Auto loans on luxury or depreciating vehicles: Vehicles lose value quickly, and paying interest on something that drops in value is rarely a good move.
Personal loans for non-essential expenses: Like vacations or impulse purchases.
Buy Now, Pay Later plans: These often disguise long-term obligations with short-term convenience.
Payday loans: Extremely high-interest loans that can trap borrowers in a cycle of debt.
Bad debt typically comes with high interest rates, short repayment periods, and little to no return.
How to Tell the Difference
Sometimes debt isn’t good or bad—it depends on how it’s used. Before taking on any debt, ask yourself these questions:
Will this purchase increase in value or generate income?
Is the interest rate reasonable for the benefit I’ll gain?
Will this help me reach a financial goal or hold me back?
Do I have a solid plan to repay this debt?
Am I borrowing out of necessity or convenience?
If your answers lean toward long-term value, strategic purpose, and reasonable risk, the debt is more likely to be good.
If you’re borrowing to fund a lifestyle you can’t afford or to satisfy short-term desires, you may be entering bad debt territory.
“Debt isn’t the enemy—ignorance is. When used wisely, debt becomes a tool for building wealth, not a trap for losing it.”
Garrett Clark
Director of Sales
The Role of Good Debt in Building Wealth
Debt can be a powerful wealth-building tool if used wisely. Consider these scenarios:
Real Estate Investing
A mortgage on a rental property is a common example of good debt. Not only can the property appreciate, but it can also generate monthly cash flow through rent. If you use your Solo 401(k) to purchase the property, all the growth is tax-deferred or tax-free (if using the Roth portion), allowing you to build retirement wealth strategically.
Education and Career Growth
While student loans can sometimes be burdensome, they can also be an investment. A certification, trade license, or college degree can significantly increase lifetime earnings, especially when the loan is used efficiently and paid off responsibly.
Business Expansion
Small business loans can be a game-changer for entrepreneurs and self-employed professionals. If the loan helps increase profits, build clientele, or open new locations, it becomes a smart use of borrowed capital.
Solo 401(k) Personal Loan Option
One lesser-known benefit of the Solo 401(k) is the ability to take a personal loan from your account, up to $50,000 or 50% of the account value, whichever is less. Remodelers, for example, can use this to fund a project, bridge cash flow gaps, or handle an emergency. Since you’re borrowing from yourself and repaying yourself with interest, it’s a smarter way to access funds than using a high-interest credit card or personal loan.
Why Bad Debt Is So Dangerous
Bad debt doesn't just cost money—it limits your financial flexibility and creates long-term stress.
High interest compounds the problem: Credit cards with 20%+ interest rates can trap you in endless payments.
Your credit score suffers: Missed payments, high utilization, and defaults lower your creditworthiness.
Limits your future opportunities: High monthly debt payments reduce your ability to save, invest, or take out good debt for better opportunities.
Even worse, bad debt often snowballs—once you're in it, it becomes harder to escape without drastic changes.
Tips for Managing and Avoiding Bad Debt
Create a budget and stick to it
Know your numbers and set limits for non-essential spending.Use credit cards responsibly
Only charge what you can pay off each month and avoid carrying balances.Build an emergency fund
So you're not forced into high-interest debt when the unexpected happens.Live below your means
Focus on building assets, not appearances.Avoid financing depreciating assets
Don’t take out long-term loans for items that lose value quickly.
When Good Debt Turns Bad
Not all good debt stays good. If you overextend yourself or misuse borrowed funds, even the best debt can become a burden.
For example:
Buying a rental property without understanding the market or having reserves for repairs could lead to losses.
Taking out student loans for a degree with limited job prospects might result in high payments with little income.
Using a business loan for personal spending or unnecessary expansion can harm your company.
The line between good and bad debt often lies in your discipline and planning.
Debt as a Tool
Debt itself isn’t the problem—how you use it determines whether it helps or hurts your financial future. Good debt should provide long-term benefits, such as cash flow, appreciation, or improved earning power. Bad debt, on the other hand, drains your resources and keeps you stuck.
When in doubt, ask:
“Will this help me grow my income or wealth, or will it cost me more than it’s worth?”
By learning how to strategically manage debt, you can build a strong financial foundation, avoid costly mistakes, and move confidently toward financial independence.