Updated on 08.05.09

The Simple Dollar Podcast #13: Good Debt, Bad Debt, No Debt

Trent Hamm

The thirteenth episode looks at the concepts of good debt, bad debt, and no debt. Total length: 7:25.

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Episode Notes
Here are some additional notes that go alongside the comments in the podcast. Approximate times for the corresponding links and notes are listed.

0:00 – The theme song is a snippet of a Camper van Beethoven concert on October 25, 1986, shared via their very open taping policy. Listen to the concert in its entirety.
0:45 – There’s actually a solid book by Jon Hansen on this topic.
1:11 – Is an auto loan good or bad debt?
2:22 – Here are some details about John’s land purchase.
3:01 – A few further thoughts on good debt and bad debt.
4:21 – The “no debt” philosophy is pretty well espoused by Michael Mihalik.
5:42 – Is a student loan a bad debt? I think it can be.
7:20 – A preview of next week’s topic.

One thing I’d like to do in a future episode is have an audio reader’s mailbag. If you have a microphone on your computer and can record an MP3 of a simple, short question you might have on personal finance, careers, pop culture, or anything else you’d like me to answer, record it as an MP3 and send it to me. Keep the total recording under 15 seconds, please. Also, if you use Skype, feel free to ask your question that way – my username is trenttsd.

Comments and suggestions welcome.

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  1. Bill says:

    Because: People have 40k in the bank(Emergency Fund), then they go out a finance a cool new Prius for 20K, why not they have the cash “this is good debt”, then 6 months later… I want a “Toyota Sienna” it’s only 25k, I got 40k????? Simple math right? I still have a 10 month emergency fund right? I got 40k…

    Please find a flash player with a volume control.

  2. I recently decided I should start making a conscious effort on my site to using the terms ‘better debt’ and ‘worse debt’. How we frame the question – good debt vs. bad debt – leaves people allusively searching for the good debt. I think in reality there is no good debt, just better forms of debt if you choose to have a debt. I agree that a house debt is not bad. In the world of debt it is a better debt. However, what would be really good is not having any debt at all. If I think this is a good debt, I will be tempted (as many are) to keep it because I don’t want to get rid of something ‘good’.

  3. Greg says:

    I don’t like your definition of good debt. In my opinion the best definition of good debt and bad debt are by Robert Kiyosaki: Good debt puts money in your pocket; bad debt takes money from your pocket. (Here good debt would be debt that is taken on to fund an investment that generates positive cash flow.) Say whatever else you want to about the “teachings” of Robert Kiyosaki that you want, on this particular subject, I think he nails it.

    I certainly respect your opinion that your mortgage is good debt because of the benefits it gives your family. But at the end of the day it still is a liability that you choose to take on that costs you money. It is the price you are choosing to pay for your family’s life style.

    I have my own mortgage to support my family’s life style also. But, I certainly don’t classify it as good debt – it is a burden. Just a difference an honest different in outlook and opinion here.

  4. Dan says:

    I see good debt as something that when paid off, leaves you with something of value.

    Mortgage, paid off, your house is still worth something- car, education, same concept.

    Even though a mortgage or car loan might not leave you with an asset equal to the loan cost, it’s still good debt. The difference between the two is your premium on having that asset when you bought it.

    For example- Buy a house for $150k, it’s worth $100k in market by the time it’s paid off. Let’s say it was a 15 year mortgage and you might have paid a total of $300k with all the interest, the extra $200k that you paid for the current asset is the premium of 1)having a roof over your head when you did and 2)the true ‘cost’ of the house. In the end, you now have an asset worth $100k….and no loan over it….

    Bad Debt is something that gives you nothing ‘tangible’ when paid off. examples: food, concert tickets, gas for car. Yes, you can claim the ‘experience’ as the asset…but I look for tangibles.

    Ultimately, one has to weigh if the Debt is worth the true price. So, buy a plasma tv…yes, you get an asset, but if you spend 2k, on a 1k tv, and when it’s paid off, you could maybe fetch 250 for it….you’ve paid 8 times the true value….maybe not worth it?

  5. I had trouble listening to the real point of your podcast. I was bothered by the fact that you’d be “scared to death” if you lived in Des Moines with your kids?! And oh no! What if they didn’t have their own yard and own slide, etc? I was born and raised in suburbs near Des Moines. I was raised in a little bubble of very little diversity. Not just racial, but cultural and economic diversity. When you take your kids way out to Ankeny and stick them in a new construction neighborhood with little walkability, little history, little diversity, what are you teaching them? They are playing with kids who are coming from their same demographic; same values, same economic status, and almost across the board, their same race. That’s not the way to make a well-adjusted, broad-minded kid.

  6. Edward says:

    I do not feel any kind of debt can be classified as good debt. Debt leads to financial slavery which in turn leads to the social degradation of society as a whole. It is always a good idea to live within or below your means.

  7. I enjoyed the discussion on whether or not an auto loan was good or bad debt. I remember you commenting on auto loans on Master Your Card awhile back – it sparked an interesting discussion.

    I’m not sure how I feel about labeling things “good” or “bad” debt in general. I feel as if that there is really no such thing as truly good or bad debt. Even a home mortgage will be bad debt if you end up underwater or upside down!

  8. Cheryl says:

    One way I would look at a mortgage as good debt is this… To rent an apartment, you’d be throwing $800 into a bottomless pit, with no hope of financial return. Instead, by making an $800 mortgage payment, you will own your house someday and not have to throw that $800 (or more 10 years from now) into rent. Rents will continue to go up. A house is an investment that should grow in value over the purchase price. Pay it off as quick as you can. At 46, my house is paid off. One less bill and we are working at getting totally out of debt! The house is one purchase I never regretted!

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