Step 2: Sort Your ‘Good Debts’ and ‘Bad Debts’

In general, there are two types of debt: good debt and bad debt. Good debt is debt that can be used to increase your net worth.

Good debt helps you leverage your current wealth to create more wealth.

Examples of good debt include mortgages and business loans. The idea is that if you can borrow money and put it to work to earn more money than you pay in interest, you have good debt.

Bad debt is money that is borrowed for anything that cannot be seen as an investment. Most consumer debt falls into this category.

Buying luxury items on credit, especially those with high-interest, high fees, and penalties are viewed as bad debt.

Borrowing money (even as an investment) with a high interest rate can also be considered bad debt.

Therefore, payday lenders are often seen as offering only bad debt options. Simply put, bad debt cannot be logically justified.

Decide What Debt You Would like to Reduce/Eliminate/Keep the Same

The debt you have will likely fall into three categories:

A) Loan(s) You Would like to Reduce

Sorting Debt

Do you feel uncomfortable will your overall level of debt?

Would you like to get rid of bad debt?

Sort these loans into their own category. Keep in mind; some loans have a prepayment penalty! Beware.

You may consider consolidating your debt. Use this free tool to determine if consolidation makes sense in your specific situation.

B) Loan(s) You Would like to Eliminate

Perhaps you would like to get rid of all revolving credit card debt… Maybe you would like to eliminate all loans and live debt-free as many followers of Dave Ramsey believe.

Whatever your rationale, place all debt you want to be rid of in this category.

C) Loan(s) That Need No New Strategy

Congratulations! Loans in this category include all those you feel 100% comfortable having under your name.

Carry on.