The expression “it requires money to make money” is often used as an example of good debt. If the debt allows you to earn more income or increase your assets, then it can be viewed as positive. There are several instances when taking on debt may improve your life. 

Some people view student loans as a good life investment. Education provides opportunities to make more money or increase employability. Workers with college degrees or other technical certifications tend to have jobs that pay better.  Returning to school usually pays for itself within a few years post-graduation. 

Many people dream of owning their own business. The funds you borrow to finance your plan can be seen as good debt because it can make you money while also making you happier. Of course, starting your own business also comes with risks. However, if you are passionate about the product or services you’re offering and have relevant knowledge in the industry, then your chances of success will increase dramatically.

Real estate is often a great way to make money, whether it’s your home or another property. The most common method to make money involves taking out a mortgage to buy a residential property, living there for several years, and then selling at a profit. In the meantime, you get all the advantages of owning your own home, plus potential tax breaks unavailable to renters. Real estate can also generate income by renting it out — this applies to residential and commercial properties. In particular, commercial real estate offers eventual capital gain if you play your cards right. This can make taking out a mortgage a good debt. 

While some debt might be worth taking on, there is some debt you should avoid. Debt incurred to purchase a depreciating asset is typically considered “bad debt.” In simpler terms, if the item won’t appreciate or earn money, you should avoid going into debt to buy it. 

Most people need a car to get around, but you should avoid taking out a loan to buy one if possible. As soon as you drive your new vehicle off the lot, it depreciates, making a car loan a form of bad debt. If you have to finance a car purchase, look for loans with low or no interest rates.

While we all need things like clothes, food, and furniture, it’s not wise to put these purchases on a credit card with high-interest rates. If you must use your credit card, be sure that you can pay off the entire balance at the end of the month so as not to rack up interest charges. Otherwise, try using cash whenever possible.

By taking out a loan to pay off your existing debt, you may be able to save money in the long term. Debt consolidation loans typically have lower interest rates than credit cards so that you can reduce your overall monthly payments. However, it’s important only to use these loans to pay off debts instead of making new purchases. 

Finally, avoid borrowing money to invest in the stock market. With a margin account from a brokerage firm, you can take out loans to buy securities. If the security’s value rises before you have to repay the loan, this strategy has the potential to make money. However, if the stock loses value, it’ll cost money.

Before you make a big purchase, ask yourself if you can afford it and if it is worth taking on debt. If you have to get a loan or put the purchase on a credit card, can you pay off the debt early? Will the payments fit in your budget? Thinking carefully about new debt will help you have a successful financial future.