Recently, I received a lengthy email from a reader who had a ton of basic personal finance questions contained within. I thought it might be interesting to start an irregular “personal finance 101″ series to answer and explain some of her questions.
Many people out there make broad statements like debt is bad in order to overly simplify their message. The truth is that not all debt is bad; there are many cases where debt can actually be a good thing.
Here are some examples of situations where debt is actually good:
Debt with no interest or a very low interest rate. Any time you can get debt with an interest rate below 4%, it’s a good deal. If nothing else, you can literally take that money, put it in a high-interest savings account, and turn a profit.
Debt that enables you to acquire an asset that won’t immediately start depreciating. This means that when you go into debt, you’re acquiring something that will hold its value. This usually means buying a home; even real estate isn’t in this category, as it can be quite volatile.
The reason people claim that debt is bad is because in the vast majority of situations, it is bad. Why? For starters, you are a huge risk. Think about it for a moment: how often does “something” come up and you “have” to spend more money? Ever had a life event occur unexpectedly and drain your funds? Ever wished you could change jobs – or even taken the leap and done it? These are all examples of risk that you introduce into the mix.
In short, the only debt that’s worthwhile is debt to own a home and debt which you can directly use to earn more. Otherwise, it simply isn’t worth the risk.