We all know about a situation where you eat so much good food that you feel bloated and even sick.
The same applies when thinking about debt.
There are a number of reasons that people go into debt which can include investing to buy real estate, a home to live in, start a small business, go to university or any other situation where you spend some money in the hope that you will see a return at some point in the future.
The reality of life is that sometimes a real estate investment doesn't work out, small businesses don't always succeed and investing in education doesn't always result in a good career with high earning potential.
There is no way of knowing exactly what a good investment might be in the future, so accordingly it is not possible to know in advance exactly what a good investment is likely to be.
When you are assessing whether the debt you are taking on is likely to be good or bad debt, there are a number of important things to consider.
Assessing the level of stress that you and your loved ones are experiencing about meeting next month's expenses is a good guide to how comfortably you can afford to take on debt.
The psychological comfort factor is a simple but important indicator.
You need to know what the potential benefits of the investment are and what the risks are.
In general, it is wise to only ever invest an amount that you can comfortably afford to lose.
You need to assess the debt against the ability of you and your family to work towards your savings goals as well.
If you can't say that you are able to afford the present amount of debt which you are bearing.
Accumulating bad debt by buying things like living room furniture or a new car that you can't really afford is living on a diet of sugar and caffeine.
It is a quick fix with little nutritional value.
If you borrow on your credit card to afford an extravagant vacation, this is going to be detrimental to your long term financial health.
Good debt is when you are investing in things that are able to generate earnings in the future.
If you borrow for education, to buy real estate or start a business its akin to eating fruit and vegetables.
This does not mean that it is impossible to have too much good debt, just like it is possible to eat too much good food but it important to understand the distinction between good and bad debt.