Debt is a dirty word… isn’t it? It is something that we all strive to avoid, something we don’t want to be associated with, and something we shy away from.

Whatever the case debt is something we cannot avoid. It is something we all identify with; both the rich and poor get into debts at some point or another. Be it taking a loan to invest or eating on credit in that kiosk, debt is unavoidable.
So, if this is the case, is there good and bad dept?

Yes, there’s bad debt and good debt. But how can we distinguish the two?

One quick way is through asking yourself whether the debt is financing something that’s appreciating or depreciating in value. If the debt is financing something that’s going up in value, it’s usually a good debt and if it’s financing something that’s loosing value then it’s a bad debt.

Examples of good debt would be the mortgage taken to buy a home, a loan taken to buy a piece of land or a loan for a college education. A mortgage finances a house, an asset that appreciates in value very fast. A housing being sold at KES 5 million today, would definitely have a higher price tag at the end of this year. Imagine the possibility of renting out the bought home and using the rent money to service the loan. A student loan finances an education which is likely to result in a higher paying job and better employability.

On the other hand, an example of a bad dept would be a car loan. Most guys look forward to getting their first car loan after 6 month of employment. Most cars loose more than half their value within the first five years after being bought.

In as much as debt is something we fear, it is something we can’t do without. The trick is to ensure that the debt will have higher returns instead of being a liability.