There are all sorts of arguments out there about the distinction between “good debt” and “bad debt”.
Good debt is generally defined as loans that you take out “as an investment in your future” — things like HELOCs, mortgages, and student loans. It’s also considered “good debt” to borrow money for things that might otherwise be considered “bad debt” if the interest rate is so low on the money you’re borrowing that you could make more money by investing your cash instead.
Bad debt, of course, includes things like quick loans, credit cards with high interest rates, car loans (yes, even a zero interest new car loan), etc. — basically any unsecured loans or loans secured by assets that go down in value.
I know there are people who argue up and down that some debt is good, and that you can’t buy a house or go to college without borrowing money. (Which you can do, although it’s true that many people don’t.)
But you know what?
That doesn’t make it good debt. Because, you know, “good” sounds like a desirable thing. Like ice cream on a hot day, or getting a big bonus at work. Something beneficial that we wouldn’t think twice about.
Why don’t we call all debt what it really is instead?
That’s a heck of a lot more accurate than “good” or “bad”. (After all, debt isn’t evil either.) It’s just that some debt is a whole lot riskier than other debt — and it’s all risky.
When we go with labels like good though, we often eliminate thought from the equation. And that’s a huge mistake.
We have to put thought into deciding whether or not to borrow money. We have to evaluate the level of risk involved and how things not going perfectly might impact us if we borrow the money.
We need to ask what might happen if we borrow the money and then:
- Lose our jobs and can’t find another one for more than a year?
- The item we’re buying happens to be a dud?
- We desperately need to sell the item later but can’t?
- We graduate with an advanced degree and end up working in a call center?
- We drop out of school?
- Our vehicle catches on fire and we’re left owing what the insurance doesn’t cover?
- We forget to pay our 0% interest debt in full by the deadline?
In other words, we need to think through less-than-perfect scenarios and imagine how they might impact us, without brushing them aside mentally with an “oh but that won’t happen.” (Two of the above items happened to me.)
In many cases, borrowing money is not the smart choice, and it’s definitely not the only choice. It’s just the easiest and most obvious choice.
Don’t believe the good debt lie. Remember that all debt is risky, and be sure you’re making a choice you can live with.Posted in Debt on 01.17.11 with 16 comments.