Is getting into debt always bad? Or is there such a thing as “good debt”?

While high inflation is forcing some Canadians into debt to cover basic living expenses, it’s important to know that not all debt is bad.

Unfortunately, debt is inevitable for many Canadians, but there is a difference between what is considered “good” debt and “bad” debt.

Jason Heath, certified financial planner at Objective Financial Partners, explains that good debt is when you borrow money to buy assets that tend to increase in value over time, which can help create of wealth.

This can include borrowing to buy a home, investments, or rental property.

These loans often have tax-deductible interest, such as when you borrow money to invest in stocks, bonds, or exchange-traded funds (ETFs) in a taxable account.

Another example is the purchase of a property for rental purposes. “The mortgage interest you pay monthly would be deductible against rental income,” says Heath.

In some cases, student loans can also be a form of good debt. “If you’re borrowing money to pursue a program that will allow you to earn a higher income and have good job prospects, I would say that’s good debt,” says Heath.

Jessica Moorhouse, Certified Financial Advisor and Host of the More Money Podcast, explains that bad debt occurs when you borrow to buy things that decline in value over time, like most consumer goods, especially if that debt comes with high interest rates.

Bad debts include borrowing from your credit card, which can have an interest rate of up to 20% or more, and payday loans, which can charge interest. average a shocking 540 percent on an annualized basis.

According to Moorhouse, unsecured lines of credit with interest rates above the current average 7% is also considered bad debt and should be avoided.

Moorhouse says people mostly resort to credit cards or payday loans because they don’t have enough savings. She says building an emergency fund should be a priority to avoid bad debt.

“There are times when people will go backwards rather than forwards on their journey to financial independence,” says Heath. “But living within your means, making a budget, forecasting your income and expenses, even if it’s only for a few months, can avoid unpleasant surprises.

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