On Good Debt and Bad Debt

IMG_35882 by eric731 on Flickr!One of the most common ideas that personal finance writers bring up is the distinction between “good debt” and “bad debt.”

There are several fairly similar definitions of each kind of debt, but generally they either revolve around the terms of the debt (low interest rate debts – usually below 7% or so – would be “good debt”) or the purpose of the debt. For example, debt taken on that allows you to purchase an asset that retains value (such as a house or an education) is often considered “good debt” while debt that is used to purchase things that rapidly decrease in value or have no tangible value at all (like credit card debt) is considered “bad debt.”

My take? I think the idea that there is debt that is inherently “good” and there is debt that is inherently “bad” is wrong. It’s fairly simple to find example where a debt that is “good” in one situation is “bad” in another.

For example, take a person living in New York City with all of their friends and family available via train or subway stops. For that person, a car loan is almost assuredly a “bad debt.” However, for a person that lives in rural Wisconsin with their job more than forty minutes away, a car is necessary for employment, so a car loan is probably a “good debt.”

Another example? A debt at 7% when the Federal Reserve has the interest rates high (as they were circa 1980) enabling you to buy CDs at 11% (as they were circa 1980) is almost assuredly “good debt.” However, a debt at 7% now with interest rates as low as they are is almost assuredly “bad debt.”

In a nutshell, I don’t buy the “good debt” versus “bad debt” idea. That doesn’t necessarily mean I think all debt is “good” or all debt is “bad,” I just disagree that there are clear rules that tell you when debt is okay and when it is not. Instead, if there really is a distinction between good and bad debt, I argue that it revolves around the distinction between want and need.

Here are a few principles to consider.

Know the difference between wants and needs. You should never take out debt for something you want, though you may be in situations to take out debt for something you actually need.

For example, if you’re taking out a loan to buy a car because you need it, don’t get a bigger loan to get a “sweet” car because you want that nicer car. Go with a lower-end model that serves your need.

Sometimes telling between wants and needs is easy. You don’t need things that are for entertainment purposes only. You don’t need high-end versions of expensive items. Those are things that you should save for, not incur debt for so you can have them now.

Another example: my wife and I took out a home loan after much discussion because, with a young child and another one on the way, we were simply running out of room in our tiny apartment. Our loan rode the fine line between want and need – we bought a larger house than we needed at the moment (but far smaller than what we could have been approved to buy), but we also anticipate having more children.

Spend less than you earn. Every single pay period, you should strive to spend significantly less than you earn. That gives you a large amount of “left over money” which you can then save for the future – and, yes, some of that savings can be for items that are “wants.”

Practice patience. Many people get into debt trouble simply because they are impatient to acquire the things that they want.

Instead of waiting until they have the cash in hand to buy that flat-screen television, they put it on the credit card, pay it off in bits and pieces (fighting against a 19% APR), and wind up spending a huge premium just to have it now.

Alternately, they could start saving now, actually save less than the cost of the television (thanks to interest rates in the savings account), and purchase the television with cash, incurring no debt.

A few months of patience can save hundreds of dollars, and it can also provide time for shopping around for the best price on the item, saving hundreds more. Patience, particularly when it comes to wants, pays huge dividends.

From my perspective, it’s not so much a matter of “good debt” and “bad debt” – it’s a matter of knowing the difference between wants and needs, planning ahead for both, and being patient, particularly when it comes to wants. With those principles in hand, you’re much more likely to find success managing debt than by following a generic list of “good debts” and “bad debts.”

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  1. Johanna says:

    From your want/need principle, it follows that as long as there exists rental housing that adequately meets your housing needs, you should never buy a home unless you can pay cash. Did you really mean to say that?

  2. Kenny says:

    I generally think debt should be avoided when possible. If you absolutely need a car to get to work and have no money to purchase one outright, I can see making a case for borrowing. But, you probably also should have had a car savings so you could pay cash for a car in the first place.

    Obviously, that is the ideal and not always the reality. But, my plan for my future is to live as debt free as possible, which means that I want to have a savings to use for things like car purchases and emergencies, in order to avoid going into debt — even if that debt may have been useful (such as providing transportation to a job that pays money).

    I’m a long way away from that and can only hope and pray that I can avoid those situations where I will need to borrow (because I don’t have the savings currently)

  3. Nero says:

    A car loan is bad debt no matter how you slice it. A car, in general, is a very bad investment. It depreciates faster than literally everything else.

    Personally, I consider all debt as “bad” debt. If you can’t afford something, you simply can not *currently* afford it. Our society, however, does not understand this principle because debt and credit have been around, available, and easy to use for so long we have lost the notion of paying for things “out of pocket”. There was a time when people literally paid for everything in cash (car, home, education) because there truly wasn’t credit or debt available to them.

    Now, anyone can (still) get credit (albeit at an extreme interest rate) regardless of whether or not they can actually afford the item (now or ever) in question.

    I also agree with the comment above regarding housing. Owning a home is never a need, especially given the abundance of rental property available literally everywhere due the “housing crisis”. However, owning a home is probably a better investment than renting long term, as with a rental property you never actually own your property, regardless of how long you pay (except with lease-to-own property).

    But, even then, most individuals (and families) rush to get a home before they can even afford the 20% down payment, citing “family expansion” and “lack of room” as reasons. What happen to the idea of not having children if you can’t afford them? If you don’t have room in your apartment for a child and you can’t “out of pocket” afford the down payment on a house, then maybe you shouldn’t have a child? Maybe? Anyone?

  4. Michael says:

    @Johanna:
    Trent specifically noted (using his own home loan as an example) that some debt is okay when planning for the future. Clearly this would include purchasing a home via a home loan, which in some cases is very smart financially.

    The rent/own thing has been done to death here — hopefully that’s not where you’re heading with this.

  5. Susy says:

    I think most debt is bad because you’re paying someon else for that money. We’re hoping to have all debt (including home) paid off in 2-3 years. Even though it’s all sub 6% interest rate, I think the freedom from not having too many expenses will be wonderful.

  6. leslie says:

    I always thought of federal student loans as “good debt” since your education is an investment that will pay off (on average) and the interest is tax deductible.

  7. Kenny, you said what I was going to say! The best scenario is one where you have no debt, even for worthwhile things(like a car to get you to work).

    I think that a good debt needs to be financially expedient in the long term(a home is a good example of this). Debt from shopping for tons of clothes and shoes and DVDs is not really going to be financially expedient in the short run OR the long run.

  8. Krista says:

    I think the real question is whether incurring the debt provides an opportunity that you wouldn’t otherwise have.

    A business loan is debt, but the benefit of creating a job and security and (assuming you’re a good business person) profits for yourself outweighs that.

    A mortgage is debt, but if you’re creating the opportunity to live at very little expense in your retirement, then you’ll benefit from the debt.

    The “no debt, no matter what” mantra that so many people on here have is short-sighted – every scenario has pros and cons that need to be evaluated individually.

  9. Nero says:

    “The “no debt, no matter what” mantra that so many people on here have is short-sighted – every scenario has pros and cons that need to be evaluated individually.”

    But every person can rationalized the pros to such a great extent that literally everything becomes a “need”, a “must-have” and “good” debt.

    A car is “good debt” if you need it to get to work. You can rationalize “need” to mean anything. Examples: I need it because I don’t want to carpool, my current car is too old, the new car gets better gas mileage, there isn’t enough public transportation, public transportation isn’t safe, etc.

    When really, those are all just justifications for getting something you “want” because the other options are not to your particular liking.

  10. Movingonup! says:

    All debt is bad, but some debt is tolerated and a necessity.

  11. Johanna says:

    @Michael: As I interpret it, Trent is saying that his home loan was OK because his growing family needed more space, and would need still more space in the future. Presumably they did not have the option of renting a house or a larger apartment (maybe rental housing for families isn’t available in their area), so they needed to take on a home loan.

    So I’m asking, what about people who don’t plan to have children, or who live in areas where houses or family-sized apartments are available for rent? For such people, buying a home of any sort is a want, not a need, or even a future need. So does that mean they should never get mortgages?

  12. Ryan McLean says:

    @ Movingonup! – I will happily disagree with you. Not all debt is bad. In fact in my business I have personally used debt to allow me to have the exact job I want and to earn more money than I was ever earning before.

    @ Trent – I think you contradicted yourself because you gave examples of their being good and bad debt yet you said you don’t believe their is good debt on bad debt.
    I think you mean that the definition of good debt and bad debtis dependent on the situation one finds themself in. It is different for everyone

  13. Mike Dunham says:

    Also, to play devil’s advocate a little bit, one could make a case for the notion that sometimes, debt for the sake of having debt – WITHIN VERY MANAGEABLE LIMITS – is “good” because it allows you to build credit history. Take two people who are virtually identical in every meaningful way, except person A has never borrowed any money and therefore has no credit history, but person B has had a couple of credit cards, has made a few purchases that might not (strictly speaking) have been out of “need”, but has paid everything off and is no longer carrying any debt. Now it’s time for these people to buy a house. I guarantee person B will get better terms because s/he has a credit history that person A does not have. To date, person A has spent less money by having no debt, but over the longer term, person A will be worse off financially by not having had the debt.

    The moral of the story is that carrying some debt at some point in your life is a necessary evil, but if properly managed, will ultimately provide a long-run benefit.

  14. liv says:

    this article was nothing like what i thought it would be about. i thought there was gonna be a given distinction about what is good debt and bad debt according to the “rules”…but i guess that could be another posting? haha.

    sometimes i have a hard time wanting to get into debt for something like an updated car to replace my old one, but it’s gonna take me like 4 years to save and i don’t know if i can wait that long.

  15. steve says:

    I think a good way to look at the debt question is this: what is the actual return on investment on your debt? If you are using debt to buy an income producing property (business), you would look at the cost of the debt over time as compared to the income created by the property or investment. Hopefully, you get a positive ROI. If not, you would generally avoide taking on the debt and going through with the deal, because it is a money loser.

    Now, it may be you are willing to pay (have a negative ROI) for something if you have a strong emotional attachment to it.

    In most cases, if we evaluated our personal purchases, we would find that they have a negative ROI and, in many cases, even on the emotional side, are not worth it (does that flat screen really improve your life? well only you can answer, but to me it doesn’t and can be safely foregone). So to add debt charges onto a purchase that doesn’t even really bring emotional satisfaction doesn’t make sense to me, according to these criteria.

    RE: credit card debt being bad: no, it isn’t, necessarily–there are valid reasons for using a credit card in certain scenarios. It’s just that most people seem to use them to put off dealing with their ongoing budget shortfalls and spend past their means. However, I know a successful businessperson who partly financed her business (a lifetime dream of hers, and a very successful operation) on a $26,000 or so credit card balance transfer, in combination with other funds. Given that she had already examined about 7 business opportunities over a period of 5 years before deciding to go ahead on this one, you can be sure she looked at ROI, as well as emotional factors (like, do I want to operate and live and raise my family in this state, or that state?) when deciding to take on a 30,000 credit card debt in addition to her other business debt obligations.

    But very few people seem to use credit card lines of credit like that. In my experience and anecdotally, mostly they get used for “consumption” spending.

  16. steve says:

    @liv

    one question to ask yourself if you think you might have trouble waiting 4 years to buy a new car:

    ‘what bad thing will happen to me if I wait until I have the cash on hand before buying a new (or newer) car?”

    Only you can answer that.

    If it is more a matter of needing to see progress towards your goal, making up a monthly progress chart towards buying your new car (maybe a 4×12 grid, or 48 squares) where you can reward yourself after filling in every 4 blocks of payments (every 4 months) will help you to see and feel that you are accomplishing something as the months go buy. Also, putting the cash in a separate bank account or subaccount.

  17. Lurker Carl says:

    I’m with the crowd saying all debt is bad. Debt means you’ve taken away from your future earnings in order to buy something now. The bad part is no one can predict the future. Some particular debt notes are worse than others, it all depends on individual situations and specific circumstances.

    Speaking of debt, Robert Kiyosaki (get-rich-quick via highly leveraged real estate) seems to have vanished since this current unpleasantness with the real estate market sprung up. Has anyone heard from him lately?

  18. spaces says:

    Bad Debt: What I owe.

    Good Debt: What I am owed.

    :-)

  19. Marle says:

    “From your want/need principle, it follows that as long as there exists rental housing that adequately meets your housing needs, you should never buy a home unless you can pay cash.”

    Sometimes a mortgage makes a whole lot more sense than renting, even in the short term. Because of the housing bust, we were able to move from a tiny apartment to a beautiful 4 bedroom 3 bath house in a better neighborhood for $50 more a month. We have a 15 year fixed rate mortgage we put 20% down on. Given the way the housing market is, every renter should look at buying a house. As long as you don’t get a stupid mortgage it could easily be smarter to buy than to rent right now.

  20. mk says:

    I like spaces #16′s definition of good vs. bad debt. :) Just watch out for credit losses. (I loaned some money to a friend 2½ years ago and have yet to get it back.)

    Also, about the point on the flat screen TV that is made toward the end of the article. Not only will you spend less on buying the TV if you save for it (because of the interest earnings) but chances are that by the time you have saved up enough money to buy it, prices will have dropped too! This holds true for most low- and mid-range high-tech products such as most home entertainment, computers, and so on.

    I would also say to ask yourself if you really NEED a flat screen TV. Most people who have (more or less of) a need for a TV could probably do just fine with an old “thick” one. The only people I can see who would actually need specifically a flat screen TV would be those who live in small homes but need a larger picture.

  21. Nate says:

    The “all debt is bad” statements are ridiculous. Debt is a useful tool. I used debt to finance my professional education that allowed me to obtain my current job which pays much more than I likely would be earning otherwise. Debt allowed me to purchase a vehicle I’ve driven for 11 years now (8 years longer than it took to pay off the debt) with zero problems. And debt will allow me to build my business and set me up financially for the rest of my life.

    People that say “all debt is bad” just don’t know how to use it to their advantage.

  22. J. says:

    hmmm… is a university education a want or a need? is attending a private 4 year institution a want or a need?

    your logic suggests that you should always opt for the education that requires incurring the least debt, which seems a bit short-sighted.

  23. cv says:

    @ liv and steve,

    To add to what steve said, even if you think your car won’t make it another 4 years, putting it off as long as possible and saving in the meantime is definitely worthwhile. Saving for two years and taking out an $8k loan is much better than taking out a $16k loan now (actually, it would be $17k or $18k now, due to interest).

    So if you keep asking yourself, “What bad thing will happen if I wait another month to buy a new car?”, you might find that you can put if off for quite a while, and each month you put it off will make your financial situation better. Then, if you get to a month where the answer is “I’ll have to spend $2500 on repairs” or “The car will leave me stranded on the side of the highway” you can make the leap and get the new car.

  24. Studenomist says:

    It depends on how you look at debt. Some people have no motivation to work unless they have something to pay for. Other people feel a strong desire to work because they have debt in the form of a home or car. Owning a home motivates most people to work and many will argue it is a good form of debt.

    Unlike the U.S, in Canada we can not claim the interest we pay on our mortgage. We have more of a motivation to pay off our mortgage as a result of this. Being only in my early 20s I have a mortgage because I purchased a rental property to help with my passive income on day.

  25. femmeknitzi says:

    I agree that the terms good debt and bad debt are a fallacy. Debt is debt. Good or bad, you are in the hole. You are not financially free and that way of thinking really leads to complacency with debt.

    When people accept student loans and home loans as good debt, they never attempt to pay more than the minimum payment. They never sacrifice getting new countertops or a new car to get it paid off. We get this attitude that good debt is a big debt that’ll never get paid off and so we accept that we’ll simply always have that payment each month.

    Thus, you get a windfall and it doesn’t even occur to you to pay down your mortgage or student loan. Instead, you go out and buy new furniture or buy a Wii. Whereas if you were carrying credit card debt, you’d want it off your back ASAP!

    That said, debt is not ALL bad. Few of us can own a home at all without taking on debt and education is truly an investment because it’s one of the few ways to truly increase your income-earning potential.

    I think it has to be middle of the road. Accept debt cautiously on items that will appreciate (such as a house or education) or items that you must have to maintain a good job (a car), but don’t get complacent about ‘good debt’. Do absolutely everything in your power to get rid of it, even if it means consuming less and don’t take on more.

    Because good or bad, wouldn’t none be best of all?

  26. SP says:

    “Debt means you’ve taken away from your future earnings in order to buy something now”
    With my debt, I bought future earnings. (modest student loan which led to a solid career). How frivilous of me.

  27. SP says:

    Oh, and the college degree was a want. Really, almost everything is a choice, something you choose to “need”. All wants aren’t bad though. I want some new shoes, I want a solid career, I want an emergency fund, I want a new car….

    ROI seems to be the best way to look at it, but usually, it isn’t easy to calculate.

  28. tinybird says:

    There’s no way that all debt is bad. I guess I should’ve just gotten a job that my high school diploma would’ve earned me instead of taking the Federal Student Loan and getting an engineering degree so I can help fix the infrastructure of our country.

    Needs and wants are sometimes very difficult to separate, but if you’ve read TSD more than once you know that this site is not all about absolutes.

    Trent would be wasting his time here if people just blindly follow his advice without thinking about it….like people blindly followed the advice of shadey mortgage lenders and got loans that they couldn’t afford and didn’t bother to read the fine print about.

    Comparing needs and wants is about actually THINKING about your money decisions, as opposed to just blind spending for emotional reasons.

  29. tinybird says:

    Ok a slight clarification….I wasn’t comparing Trent to a shadey mortgage lender. I meant that he tries to get people to think about things and make conscious choices instead of just blindly doing what the next person is doing.

  30. jm says:

    Of course there’s good debt. If you borrow at 4.25% and invest the money to make 6%, that is but one example.

  31. Lurker Carl says:

    Borrowing money to purchase anything means you’re paying a percentage more for that item than it’s actually worth had you paid cash. Paying more than something is worth is bad, even when it benefits you in the long run.

    We are entering what is likely going to be a long and painful recession. The US hasn’t experienced a protracted recession in several decades, this one will see massive restructuring of major industries. And big tax increases. And inflation. The idea of good and bad debt changes dramatically when you lose your job. All debt becomes bad debt when you don’t have the cash to pay it back.

    There is a certain fallacy today that everyone needs to go to college in order to become “successful”. There are many folks who regret making that decision. Unaccreditated schools, private student loans, poor degree choices, over-priced tuitions – the money was borrowed from their future in sums that do not materialize upon graduation in order to make the monthly payment.

    As for needing to attend college, there are many career fields that are begging for apprentices that do not require degrees. Rebuilding the infrastructure requires more than everyone receiving a sheepskin. Becoming an engineer is fine but who will hammer, weld, wire, plumb, dig and otherwise construct whatever you’ve engineered?

  32. Thanks for pointing out the difference between needs and wants. I find that confusing the two always leads to regretted purchases and debt.

    I’m working on the patience angle. Some days are better than others.

    Another great post. Thanks for sharing.

  33. George says:

    > Becoming an engineer is fine but who will
    > hammer, weld, wire, plumb, dig and otherwise
    > construct whatever you’ve engineered?

    The people that are paid an average wage instead of being in the 80th percentile.

  34. KC says:

    I’ve always heard “Never go into debt for something that will not increase in value.” That used to mean don’t go into debt for anything but a house. But now houses don’t necessarily go up in value (although over long periods of time they are very likely to).

    Education is a big question mark. I’ve known people who wanted to be social workers and went to private college incurring a lot of debt. I’m sorry, but that is not “good” debt. I’ve known doctors who were a quarter of a million dollars in debt from private and out-of-state med schools – again not sure that is good debt, especially if you choose one of the lower earning fields of medicine.

  35. deepali says:

    I think it would be helpful if we stopped talking about “good” and “bad”, and started talking about what can live with and what we can’t. it is not only situational, it’s non-judgemental.

  36. Louie says:

    im going to have to disagree with lurker carl,
    i have found myself in a heap of private and govt student loans to fund my education. I have no qualms about this, its a fact of life that i will have to work really hard and be very diligent in my first few years post graduation to battle down my student loan debt. aside from a rather unimportant fact that i increase my earning potential, my fulfillment potential and my enjoyment out of what i have decided to pursue is going to be worth way more than the 70 grand i spend in school…let alone the 30 that i “wasted” exploring every different part of the educational spectrum.

  37. JCD says:

    I have been reading this website for awhile and love it! This article really hit home with me because my husband and I always discuss good debt vs bad debt and paying off debt early.

    We considered student loans and mortgages to be good debt for us. My husband and I had $40K in students loans when we got married and have since paid it off. In my husband’s field, his having a Master’s degree automatically increaded his pay $20K so the student loans were well worth it.

    I don’t understand how people can say that mortgages are bad debt. We bought our house 12 years ago for $95000 with a 15 year loan that will be paid off in less than a year. At the time we purchased the house, we paid $550 in rent and went into $850 mortage payment. For $300 extra a month we actually started to earn equity in our house and locked in a fixed payment. The same apartment today is renting for $800. If we had stayed renters we would be paying almost the same amount today and not have our home equity!

    We also decided to not pay extra on the house during 2001-2006 time period because our mortage was only 5% but we figured we could double that in the stock market so we put our extra in our retirement fund. In late 2007 we figured the bubble was bound to burst so we went back to putting extra toward our mortgage. During those 5 years we averaged 18% profit on our retirement funds. We are now spliting our extra money between retirement and mortgage debt since stocks are such a good buy now.

    We are only 38 so before age 40 we will have our home paid off, no debt, and a great start to our nest egg. If we had stayed renters we would always have a housing payment that would continue to rise. Now we know we always have a home!

  38. I agree with the point that debt can be a necessary evil; for instance when you purchase a home. Most people buy a house to raise a family and provide shelter. Very few people have the means to save up the cash that is needed to buy a house with out financing at least some portion of it. In my opinion this is a good “debt”. Typically homes are assets that appreciate in value, the interest is usually low, and tax deductible. The only exception I would make to this rule is when an individual purchase a home that is well above what they can afford.

  39. Gerard says:

    Trent, I agree with your thoughts on good debt and bad debt. Sorry to be nit-picking but with regarsd to borrowing at 7% to invest at 11%, I wouldn’t necessarily agree with you. It would depend on whether inflation during that period beat 4%. Otherwise, if inflation was at 8% you’d be earning a negative real interest = not good!

  40. Kris says:

    My Opinion: There is no “good” debt. There is tolerable debt, for instance in many areas you will have to borrow something to get a home, but you should strive to get out of debt quickly.

    @ Leslie: I 100% disagree about student loans being good debt. First, there are ways to go to school without taking out loans… but most people do not look into it ( I admit, I was 1 of them ). Second, 1/3 of the students that take out these loans, never finish school ( again, I was 1 of them ). Third, if you actually do get a good paying job and make more than 55K net a year ( this was some 5 years ago so the amount may be different now ) then you CANNOT deduct the interest on your taxes( again, I was 1 of them ).

    My overall view of debt is that debt is a ball and chain that slows you down financially in life.

  41. conny says:

    good debt, ROI with risk premium.

    What you mean in six words.

  42. Ishtar says:

    Timing is also important. If you struggle to afford a mortgage, it might not be ‘good’ debt, no matter what people are saying.

  43. Floriano says:

    I agree 100% with this post. I’m 22 and I agree that the secret to manage your finances is to balance your “needs” and “wants”, just like you said, Trent. But, I guess especially when we are young, it’s really difficult to do that. I know it because I’ve been fighting the urge to buy an Xbox 360 for 1 month now, and since I live in Brazil, I need to wait until February to buy it, which is the closest thing we got to the american “Black Friday”, when everything is cheaper.
    Being able to wait 2 more months to buy my “WANT” will not only save me around 15-20% on the purchase itself, it will also allow me to have enough money to pay for it in cash and build a little bit of interest on that money while I wait.
    Of course, it’s really though reading about all the new games coming out and all my friends playing it… but I believe it will feel like a much better purchase when I think about the total cost of buying it now.
    Great post!

  44. reulte says:

    Johanna – I think that you’re missing the criteria of time when contemplating the rent vs own scenario. My math is terrible so no examples, but at the end of paying off the debt, you own a home; whereas with renting — there is no end in sight.

    This once again depends upon individual circumstances.

  45. Jamie says:

    I was fortunate enough to have a father who taught me about money & debt. His advice to me was that you should only ever go in debt for three things in life: your education, your first house, and your first car.

    I think Kris (Comment #34) got it exactly right, these debts are tolerable, not good. Even though these debts are tolerable, I’ve kept them minimized as much as possible by paying them off early or avoiding them altogether.

  46. J says:

    It’s interesting how the “good debt” and “bad debt” parallels the shades of gray that inhabit out world in so many other choices and tradeoffs.

    From my experience, debt is something I should have avoided a lot more. Having it means that I’m not really free to choose my destiny, rather it is controlled by student loans and the car payment (thank God we paid off all credit cards years ago). The impact of the “pay later” mentality now affects my family life in a negative way, we are working our way to a place where we will be able to live how we want to, but it’s going to take at least a year and a half to get there — maybe two years. And that’s “not bad”, compared to other stories I’ve heard.

    Hindsight is, of course, 20/20, and based on that hindsight, the only possible debt that’s worth having would be school loans or a mortgage. All the other stuff (car loans, credit cards) are merely ways of receiving instant gratification. I understand that people may need to get a car loan when they get out of school to get to work — but that loan should likely be more to the tune of $5000 for a decent used car that will last 3 years (Civic, Corolla, etc) than $25,000 on a new car.

    People should listen to a few Dave Ramsey podcasts, and pay special attention to the people who built up a pile of debt with “good intentions” — starting a business, getting an education, paying medical bills — to know just how quickly things can go really, really bad — and how long it is going to take them to fix the problem.

  47. Karen says:

    You are so right about debt being situational.

    About 4 years ago, when we started to realize all of our mistakes with money over the years, we were about $50k in debt, not including our house. We decided to begin working our way out, but realized we would have to spend some additional money if we ever wanted to get ahead. We decided to stay in our current house, but it would need to be properly remodeled from a 2 bedroom home into a 3 bedroom home (previous owners tried, but there were so many problems that we found out while ripping everything out were safety hazards). We paid cash for all of the material and did the work ourselves (it still cost us about $10k), but it caused us to postpone being debt free by several years. However, we will be ahead in the long run by making this choice as the improvements we did will pay off if we ever sell, plus we don’t have a larger home loan if we had just decided to move to a larger home. Based on our remodel, neighborhood and potential future ROI if/when we sell, this was a good investment for us.
    2 years ago, we went into additional debt by over $10k to gain custody of my husband’s 3 kids. Their living situation with their mother was not going to wait on us to save up that money. There is no way to put a montetary ROI on this money. However, the security and stability of the kids lives with us is priceless. There is no way I’ll ever complain about how much money we ‘lost’ to interest in our situation.

  48. leslie says:

    @Kris: I wanted to thank you for mentioning the limitations of student loan interest deductions. I looked up some information and here are the facts:

    “You can deduct up to $2,500 in student-loan interest paid in 2007 if your income for the year was $55,000 or less if single, or $110,000 or less if married filing jointly. Single people can take a partial deduction if they earned up to $70,000 for the year, or $140,000 if married filing jointly.”

  49. spaces says:

    My post above is perhaps too flippant:

    My spouse and I are each spectacularly in debt — student loans. Even though we both worked a LOT during school, had some nice scholarships, and we went mostly to state schools, I came out of my programs (JD + LLM) and he will come out of his soon (MS + PhD) with a level of educational debt that disqualifies me entirely from writing on a personal finance website, evar, except to say ZOMG, the daily, weekly, monthly interest accrual is a thing of staggering suckage.

    Our degrees have been worth every penny, insofar we each did well enough to enter at or near the top of what our professions had to offer. We each did just about everything “right.”

    But I have a hard time thinking of it as “good” debt. Some of it is financed at interest rates below 2%, and it’s the cheapest money we’ll ever see. None of it is at an effective rate higher than 6%. In this, we have also done just about everything “right.”

    But I still can’t view it as “good” to owe that money. It affects every lifestyle, long-term decision we make. Not about big screen TVs, or cars, or lattes or other silly things we don’t need and never wanted in the first place — but where we can and can’t live, where he can and can’t teach, what clients I can and can’t work for, just to keep up with the debt service.

    THAT’s not GOOD.

  50. ChrisE says:

    What about student loans? I would like to go back to school to be retrained in a field that I would enjoy much more than I enjoy my current career. But the earning potential in my new career is probably not as high as my current one. Would this be good debt – paying for an education for a career that wouldn’t pay as much, but would bring me much more fulfillment?

  51. jamie says:

    I am completely with spaces above (#41). I am currently accruing an insane amount of student debt getting my PhD — I will probably be $80,000 in the hole WITHOUT interest when I am done — and although I have had scholarships, have done very well, and go to a prestigious university, that amount of debt is still staggering to me and it is major question to me whether or not this has been the worst decision of my life. Plus I will be finishing the PhD when I am either 26 or just 27, and so I have already removed four or five lucrative working years from my life in terms of building a retirement fund, which scares me a lot too. Luckily my partner will graduate with no debt… but very little savings either. Is this good debt? Is this bad debt? Will my PhD ever pay off? I have no idea and I worry about it all the time.

  52. George says:

    Instead of talking about debit, the bigger point is how to get out of debt. Debt is good if makes you money. People get rich only because they are in debt. The bad debt is debt on items that go down in value (TVs, cars, furniture, etc…). Good debt is debt on investments that go up in value more than the interest rate of the debt. For this reason, I would never pay for a house with cash, but I would and do for TVs and cars. I use credit cards wisely to leverage my investments, and if you want cash from credit cards, it is easy, open a free merchant account with PayPal or Google and you got low interest cash! If you want a good credit card, go to my website: http://www.iCreditStore.com and don’t settle for any random offer you get in the mail!

  53. Sally says:

    There is another way to have your flat screen tv (or whatever) sooner rather than later. Wait for special deals – 3 mos – no payments no interest, 6 mos, 1 year, etc. However, you must have total discipline and divide the # of months by the bill and pay it every month – and in it’s entirety before the interest free period comes due. I don’t recommend having more than one of these deals going on at the same time though! We bought a tv this way about 20 years ago (the tv is long gone) and have used this method here and there to “finance” our wants.

  54. Danny says:

    “Trent, I agree with your thoughts on good debt and bad debt. Sorry to be nit-picking but with regarsd to borrowing at 7% to invest at 11%, I wouldn’t necessarily agree with you. It would depend on whether inflation during that period beat 4%. Otherwise, if inflation was at 8% you’d be earning a negative real interest = not good!
    Gerard @ 11:46 pm November 12th, 2008 (comment #33)”

    You are earning interest on someone else’s money. You aren’t getting a negative real interest rate.

    If you didn’t borrow the money you would have $0. By borrowing at 7% and investing at 4% you are getting a 4% return on $0 of your own money. If inflation is 8%, you can’t lose value on your $0, so you are still gaining 4% of whatever value you borrowed.

  55. Kevin says:

    Without the debt called “student loans” I have a feeling the world would be woefully short of doctors.

    For those of you saying all debt is bad – the answers are never that easy. Black and white is hard to come by, everything is usually a shade of grey.

    I also have to laugh that some of you seem to suggest eternally throwing money away by renting when it is possible to purchase a home with a mortgage for roughly the same amount of $ as the rent.

  56. Saver Queen says:

    I agree that no matter the interest rate or the purpose, debt should not be accumulated recklessly. However, I think “good debt” includes debts that are taken on that will increase your earning power – this includes school debt and a loan to start a small business. Being considered “good debt” doesn’t mean that you shouldn’t do whatever you can to pay it down quickly, or that you shouldn’t carefully weigh your options and your risks before you make the decision. For example, if you take a student loan, you should probably work while going to school, live frugally, and accelerate your studies as quickly as possible to finish early and start earning income. A business loan should only be taken on with a viable business plan, dedication to work long hours and do whatever you can to make your business a go, and a well-researched analysis of risk and gain.

  57. quirks says:

    @Kevin: Thank you for saying that! I am in the process of applying to medical school, and aside from joining the army or the navy, there’s no way for me to avoid a ton of debt (I’m estimating over $200,000). I’m a resident of DC so I don’t even have a state school. The only other way to avoid the debt would be to not go to medical school. I would rather be in debt and a doctor than simply not be a doctor (I do not have any current debt).

    There are only so many state schools. If future doctors in the US only went to state schools, or could afford it right from the start, the US would be facing an even greater doctor shortage than it is.

    I am not happy that this is how medical school works in the US and I don’t think it’s right, but there isn’t too much that I can do about it.

  58. Matt Mason says:

    When deciding whether or not debt is good or bad, The End Justifies the Means.

    If your debt results in you making more money… like buying a home, fixing it up and reselling it for more… or a student loan that results in more money in the end after a better career. (which is not as cut and dry as it is made out to be). Then the debt can be considered “good debt”.

    If it is not, and you end up paying more, then the debt is bad because…
    #1. The borrower is the slave of the lender
    #2. Paying more than something is worth can’t be a good thing.

    Whether or not the debt is based on a want or a need is irrelevant.

    Take the car note example. While it may be a GOOD DECISION to take out the car loan (because you need it), the DEBT ITSELF is not “good debt” because it will result in you paying more than the car is worth as opposed to MAKING YOU MORE MONEY.

  59. William says:

    I agree with the *theory* behind the idea that all debt is bad, but there are times when it’s okay to take on debt.

    If you are able to borrow money to invest in something that earns more than you’re paying in interest, that is acceptable provided the risk is not too great.

    You just need to be sure you are too exposed, which is why the people who are suffering from the sub-prime lending problems are in such bad shape. They took on too much risk, and aren’t able to deal with it now that the bottom fell out.

    Now, if you’re talking consumer debt (credit cards, car loans, etc.) it’s absolutely true that all debt is bad. You should never go into debt to buy something you can’t afford to pay cash for. If you have no other choice, say for a car that you need to get to work, never spend a dime more than you have to. That means used and reliable, not new and exciting.

  60. I would agree that in most cases a car loan is not a “good debt” except when that debt is below what your savings account interest is at.

    For example, I have a .9% interest rate on my ’07 Honda Civic with a 36-month term. I will easily drive this car 9-10 years (6-7 months loan free). My current savings account rate is 3.25%

    The idea that the “car loan” is a “bad debt” is pretty ridiculous.

    I agree with Trent when he said the good debt and bad debt argument is determine situationally.

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