MODULE 2: Good Debt vs. Bad Debt

Duration: 30 minutes

Learning Objectives:

•Distinguish between good debt and bad debt

•Evaluate whether a debt decision makes financial sense

•Understand how debt impacts net worth and future opportunities

•Make informed borrowing decisions

Content Outline:

2.1 The Good Debt Philosophy (8 min)

What makes debt “good”:

•Increases your net worth or earning potential

•Has a relatively low interest rate (typically under 8%)

•Is for an asset that appreciates or generates income

•Is affordable within your budget

Examples of potentially good debt:

•Student loans (for marketable degrees with clear career paths)

•Average salary increase with bachelor’s degree: $32,000/year

•ROI calculation: Cost of degree vs. lifetime earnings increase

•Warning: Not all degrees provide equal returns

•Mortgage (for affordable home purchase)

•Building equity vs. paying rent

•Tax advantages

•Long-term wealth building

•Rule: Keep housing payment under 28% of gross income

•Business loans (for proven business concept)

•When revenue projections support repayment

•Investment in equipment that generates income

Case Study:

Maria, 22, considering $40,000 in student loans for nursing degree

•Average nurse salary: $77,000

•Loan payment: ~$400/month for 10 years

•Total paid: $48,000

•Increased earning potential: $800,000+ over career

•Verdict: Potentially good debt with strong ROI

2.2 The Bad Debt Trap (10 min)

What makes debt “bad”:

•High interest rates (typically over 15%)

•For depreciating assets

•For consumable items (food, entertainment, vacations)

•Beyond your ability to repay comfortably

Examples of bad debt:

•Credit card debt for lifestyle spending

•Average credit card APR: 24%

•$3,000 balance = $720/year in interest alone

•Paying minimum only: 15+ years to pay off

•Payday loans

•APR often 400%+

•$500 loan can become $1,500 in 6 months

Debt trap cycle

•Auto loans for expensive vehicles

•Cars depreciate 20% first year, 60% in 5 years

•Underwater on loan (owing more than it’s worth)

•Rule: Car payment shouldn’t exceed 10% of gross income

Buy Now, Pay Later for non-essentials

•Hidden fees and interest

•Multiple BNPL debts compound quickly

•Damages credit if missed

Case Study:

Jake, 19, wants to buy a $35,000 car with $40,000 salary

•Monthly payment: $650 (19% of gross income – TOO HIGH)

•Car worth $21,000 in 3 years, still owes $15,000

•Total interest paid: $4,200

•Alternative: $15,000 used reliable car, $280/month

•Savings: $370/month = $13,320 over 3 years

2.3 The Gray Area – It Depends (7 min)

Some debt is situational:

•Graduate school loans – Depends on field and career goals

•MBA for business career: Often good

•PhD in low-paying field: Questionable

•Car loans – Depends on necessity and amount

•Reliable used car for work commute: Reasonable

•Luxury vehicle for status: Bad

•Home improvement loans – Depends on ROI

•Kitchen remodel adding value: Potentially good

•Pool in cold climate: Questionable return

Decision Framework:

Ask yourself:

1.Will this increase my income or net worth?

2.What’s the interest rate vs. my potential earnings?

3.Can I afford the monthly payments comfortably?

4.What happens to the asset’s value over time?

5.Am I borrowing for a want or a need?

2.4 The Real Cost of Bad Debt (5 min)

Beyond dollars – what bad debt costs you:

•Stress and mental health impacts

•Delayed life goals (buying home, starting family, retiring)

•Reduced career flexibility (can’t take lower-paying dream job)

•Damaged credit score (higher rates on everything)

•Relationship strain (money fights leading cause of divorce)

Real Numbers:

•Average 25-year-old with $15,000 credit card debt at 22% APR

•Paying $300/month: Takes 8.5 years, costs $15,600 in interest

•Total cost: $30,600 for $15,000 spent

•Opportunity cost: That $300/month invested = $52,000 in 8.5 years

Interactive Elements:

•Good Debt/Bad Debt Quiz: 10 scenarios to categorize

•Decision Calculator: Input loan details to see if it’s mathematically sound

•Case Study Activity: Analyze 3 real-world borrowing decisions

•Personal Reflection: List debts you’re considering – are they good or bad?

Downloadable Resources:

•Good Debt vs. Bad Debt Decision Tree (PDF)

•Debt Decision Worksheet (fillable PDF)

•ROI Calculator for Education/Business Loans (Excel)

•True Cost of Debt Calculator (Excel