Debt has become a common thing in the average American’s life. We take out loans to buy big screen TVs. We borrow money to get shiny new cars. We even borrow money to get our own money. When are we as American’s going to get to the point where enough is enough? Personally, I got to that point a few months ago. However, there is always the argument of good debt vs. bad debt. So, what’s the difference between good debt and bad debt?
Technically, good debt is debt that will create some type of value in the future. For example, you go to college (and take out student loans) with the thought that you will make more money over your lifetime because of a degree. In other words, by going into debt to get a degree, you will have a larger income than by not having that degree.
Mortgages are also described as good debt because it is something that increases in value and there are tax incentives on the debt (deductions, credits).
Some individuals also believe that going into debt is good if you can get a higher return somewhere else. For example, if you can get a 4% loan and earn 8% in the stock market, you should borrow the money. Is there such a sure thing though? I don’t think so.
Bad debt is debt that does not give you any type benefit towards your financial being or create value. For example, if you use debt to buy consumer goods and you don’t pay it off at the end of the month. You will be paying a lot of money (in the form of high interest rates) over the long run. Bad debt can include vehicles, credit cards, payday loans, etc.
Isn’t It All Bad?
I am a believer in Dave Ramsey who says that all debt is bad (other than a 15 year fixed rate mortgage). While I was in school, I believed that student loan debt was a fact of life and it would definitely pay off in the end. Thinking that caused me to take out student loans and spend my income (however small it was) on frivolous things. If I just would have spent that income on education, we definitely wouldn’t be in the predicament that we are in. Looking back, I don’t think my student loans were ‘good debt” no matter how much additional income it will help me get in the future. The stress alone is probably going to knock off 10 years to my life!
I am guessing that there is going to be some pretty good discussion on this topic. This is one of those areas that’s just like politics. Either you’re on one side or the other and neither likes the other. Please share your thoughts!