I got into a bit of a discussion with a friend, and had all to do with the title. "Good debts" vs "Bad debts". I personally don't think there's such a thing as good or bad. It's like saying there's "good cancer" and "bad cancer". I think it has a lot to do with how taboo finances and personal debt is seen for a lot of people; nobody wants to admit to doing or being involved in a bad thing, so by making it sound... different or even better, it creates a different outlook. We ended the discussion on a "let's agree to disagree" note, as I don't think there's a thing like "good debt", but more of a "better-than-the-alternative debt"
Now, I do believe debts differ from one another, but more on a 'malign' and 'benign' way. I could sound like I'm really bickering about shades of gray in the issue. Debt is debt. But what if your car breaks down and you don't have the funds available? You still need to get to work. Sure, you could quit your job and blame yourself when you can't pay your bills because you didn't plan ahead... but to be honest, nobody can really plan ahead for everything. People make mistakes. Home ownership is a dream for many, and very few can actually save enough to buy a house with cash. It is an investment that can give you much in returns if used wisely. And that's what I think is one of the main difference between different shades of debt.
On the darker end, you have the debt that pulls you in further. The typical credit card which gives you tingles in your fingers and urges you not to settle for a lesser/cheaper product or shop around, but to get what you want, right here, right now. Bigger, better, more expensive. And when you can't meet the payments, just borrow more money.
On the lighter side, you have investments in yourself or your property, which may give you returns in the future. There's also those debts you may take to avoid an even deeper fall (such as buying a car with a loan to avoid losing your job because your current car died).
Do you differentiate between debts at all? How do you classify them?
The way that I differentiate between debts isn't by "good debt" and "bad debt" but rather by varying degrees, for example, I would consider a credit card debt with a 10% interest rate worst than a car loan with a 3% interest rate, but then you also have to take into consideration the balances of each debt as well. Interesting topic, thanks for sharing.
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I used to do the whole bad debt/good debt thing. Now it is just all debt. I am just trying to get caught up and then I am paying all the low interest off first just to get rid of them and then going from there
ReplyDeleteProper leveraging makes for good debt. Let me explain. If you buy an investment property and leverage your money to make more money, it is good debt. If the rent from a property is more than making the loan payment, other expenses and making you a profit, then it was a good idea. Even though your primary residence will likely appreciate, its not an investment because it is a negative cash flow. Student loans are good debt as long as your income increases enough to more than offset the costs. However, most people don't pay back their student loans until they have graduated. They forget that they would be making $30,000 without a degree but are now making $45,000 for taking out $25,000 in student loans. However, if they are making the same amount after going to college, it is poor debt because there isn't a good return on investment. Cars and credit cards are mostly just bad debt but you can usually make the argument that you need the car to get to work to make money.
ReplyDeleteHonestly, having been in debt so much in the last 11 years I see all debt as bad debt including a mortgage which I also have which is also more than my house is worth. So for me, all debt is bad debt. I know it may not be that way for others..
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