Investor Corner/Money matters beyond investing/Personal Finance Adjacent
4.4.2 Good Debt vs Bad Debt
Good debt is generally low-cost and funds an appreciating or income-generating asset. Bad debt is generally high-cost and funds consumption. The interest rate and the underlying purpose both matter, not simply the fact of having borrowed.
Why not all debt deserves the same treatment
A home loan at a moderate interest rate, funding an appreciating asset that also provides shelter, is generally considered reasonable debt when sized sensibly relative to income. A high-interest personal loan or credit card balance used to fund discretionary consumption, an item that depreciates immediately and provides no ongoing financial benefit, sits at the opposite end of the spectrum.
The two questions worth asking about any debt
What is the actual interest rate being paid, and how does it compare to what that same money could reasonably earn if invested instead? And what is the debt actually funding: an asset with value or income potential, or pure consumption that provides no lasting financial benefit? Debt that scores poorly on both questions is the kind worth prioritising for early repayment.
How this interacts with investing
Paying off high-interest bad debt first, before increasing investment contributions, is usually the higher-return decision, since few reliable investments consistently earn more than the interest rate charged on a credit card or typical personal loan.
How PriLytics helps. PriLytics gives you a clear view of your investments alongside your goals, making it easier to weigh debt repayment against investing with real numbers. See goals with guidance.