Ninja over at Punch Debt in the Face has once again highlighted that, in his opinion, there is no such thing as “good” debt (with a blog name like that, I’m not sure you really have to guess his stance on debt!). I have to admit that while I completely agree with Ninja at this point in my life, I haven’t always.
There once was a time where I stood firmly rooted in the “good debt vs. bad debt” camp. While I’ve always known that credit card is nothing but pure evil, I quickly dismissed student loans and mortgages. I effectively gave them a free pass, dubbing each “good” debt. After all, both are essentially enhancing your earning power and bottom line over time. It turns out that I wasn’t alone when echoing these sentiments.
CNN’s Money Magazine has highlighted mortgages, student loans, and car loans (excuse me?) as good debt. Furthermore, the entire notion of taking on debt in general was discussed here. And although it’s easy to agree with their ideas such as “Of course, avoiding debt at any cost is not smart either if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money you do borrow,” I can’t say that I now would be as quick to jump on this bandwagon as I had in the past.
I’ve highlighted my mission to eradicate my student loan debt and how I’m making extra payments on my mortgage throughout this blog. Even though both of these types of debt could be labeled “good,” I have simply no desire to keep paying on them for the next 20-30 years. In short, I want them paid off so that I can channel that money to long-term savings, home renovations, and retirements accounts. I cannot wait for the day when it’s time to pay my last student loan payment and the subsequent feeling of financial freedom found when I no longer owe my money to someone else.
So what do you think? Do you believe the debt can/should be classified as “good” or “bad”?
I think it depends on how much debt you have and what it's for. Sometimes debt for school is needed, and I consider this good debt, but of course there are limitations!
I don't thinkaany debt is good. I graduated undergrad with no debt. I then took out loans for grad school because i thought it was good debt. Now that I know more about money and we have paid it off, I wish i wouldn't have taken those loans out
I don't think any debt is good that's why we're attacking or mortgage. We don't want to be at the mercy of bank interest rates. Ever.
There is NO such thing as good debt. There is nothing good about owing someone money. I have this argument with a lot of my friends and I now understand why I was in debt as much as I was. This "good debt" mentality is the same mentality that the US government seems to have. Debt is good if you are the government and want to promote socialism. Debt is also good if you are the lender. I argue with my friends when they talk about student loans. I try to look at every expense/debt as an investment. What is the return on investment? Did you spend 50k on an undergrad degree you are not even using? Could you have paid for a degree you could have gotten cheaper somewhere else? Did your student loan pay for your college and also many nights of "beer pong?" I guess I am "angry" at these ideas because I found out the hard way that no matter how you look at it, debt is debt and it is never good to owe someone money. Sorry for the ramblings…Martilyo!http://angrymillionaire.com
I'm very conflicted about this. I guess, no, there is no "good" debt. In an ideal world, we would all pay cash for everything. But for the vast, vast majority of people, this isn't realistic. Real wages have been on the decline since the 1970s and the cost of college, healthcare, food, etc. have all continued to rise. What are middle class people supposed to do, not go to college because they have to take out a loan. Pass up a better job that's farther away from home because they don't want to take out a loan to get a car? I think that the best thing to do is borrow responsibly. What does that mean? Keep your credit score in good condition so that you get good interest rates. Borrow only what you need, no more. Keep expectations reasonable (i.e., if you need a car borrow for a reliable used car, not a new BMW). The thing that's really tough about personal finance is that there is practically no rule that applies to everyone. It's hard to say to everyone, "don't go into debt, EVER!" But it's also hard to say, "debt's just fine, charge whatever you want!!" To be responsible financially, you have to use your head and evaluate every decision based on YOUR situation.
College? The problem here is that the federal govt expects parents to be willing to scale back on their lifestyle. So, the parents should scale back on their lifestyle if they make enough to disqualify the kids from Pell grants, etc.
Car? Move close to work (and walk or bike) and live with roommates. If you could afford a car payment, insurance, maintenance, AND gas for a long commute, then you can afford to walk to work and put away $600 a month. In a year, you can pay cash for a $7200 used car.
House? Downsize, downsize, downsize! If you could afford the down payment, closing costs, mortgage payment, taxes, insurance, utilities, maintenance, repairs, cleaning, and renovations for a 4-bed 3-bath, then you could afford to live in a 1-bedroom apartment and put away enough to pay cash for a condo after 5-10 years (depending on area).
Have a family? People raise multiple kids in 400 sq ft in India, in China, and even many european countries. If they can do it there, you can do it too.
There is no reason people should take out loans for these things. Pay cash and stop being a slave of the banks. Keep your whole paycheck!!!
People tend to use "good" debt to describe necessary debt. While I wont say you shouldn't take out a mortgage. I would never say that my mortgage is good, awesome, incredible, etc. Thanks for the mention
I think debt is a tool which can be used to one's advantage. Without the ability to take on some debt, opportunities for home ownership and higher education would be completely out of reach for most until middle age. Of course, as with any tool, it can also be misused to one's disadvantage. The label "good debt" is unfortunate, because it seems to plant the idea that the more debt you take on, the better off you will be. I suspect it is intentionally misleading, in order to encourage people to borrow as much as possible for homes and schools they can't afford.
Okay this is me personally but anything that could MOST likely increase your earnings would be a "good debt". Say if having a Masters would get you a promotion of a higher paying job, that would eventually be a good debt. If you can hold it off until you have the funds to pay for the degree is better of course, but if you know it'll pay off sooner rather than later, I say take the loan.Capt Sweatpants
First of all, thank you all for such thoughtful feedback! I am so excited to read all of your comments, and I will definitely be turning some of them into future post ideas!
For any of you following these comments, Rafiki posted a wonderful follow-up to these ideas: http://www.upendilife.com/2011/09/debt-is-debt.ht… Make sure to check it out!
I'm on the same page as you. Although I had to borrow money for start up costs on both of my businesses and it was well worth it, the strain of debt of any kind is taxing. All debt is bad. Even a mortgage.
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