Good debt vs. bad debt…
I often hear these terms, and both make me cringe most of the time.
I’ll explain why later, but to help you understand what these terms are, and whether there is a such thing as “good debt” at all, I asked the YoPro Wealth experts for their opinion. These gentlemen know what they’re talking about, so take their advice seriously.
Good debt vs bad debt – is there such a thing?
“I think you have to look at two things:
- What is the debt doing for you?
- Can you afford the debt?
First, is the debt helping you? Will it help you with your career, like debt for education? Do you need it for transportation, like a car? These are types of debt that are generally considered “good debt” because they can ultimately help you in the long-run.
Second, and this is important: can you afford the debt? Taking on college debt can be crippling if you can’t get a job after graduation or if your loans are exorbitant. A car can help you but that doesn’t mean you should buy a brand-new luxury model. Same idea with a house, it can be cost efficient to own but if you buy too much house it can be crippling financially too.
I think there is such a thing as good debt but you have to be careful and make sure the debt is actually working for you to build income later on.”
– Glen Craig, Publisher, Free From Broke
“In the long term, zero debt is good debt. Some believe that good debt such as a mortgage is good debt because mortgage interest is deductible on Schedule A of the tax return. However, when you do the math, every dollar of mortgage interest deducted only results in a savings of 15, 25 or 30 cents on the dollar as it is based on your tax bracket. Spending a dollar to save even 30 cents does not make sense-at least not math sense.”
– Bill Mullen, Investor Coach, Mullennium Finance LLC
“There is no hard line on which types of debt are good or bad because to an irresponsible person, all debt would be bad. To a wise steward, nearly any debt could be good. It depends more on how the person is using it. If you use debt to increase your stewardship and wealth, it can be an amazing tool. Sometimes it’s essential for success. However, if you use debt only to consume, it can be a pain.
– Chris Miles, Cash Flow Expert and Founder of Money Ripples
“My feeling about debt is that, in general, consumer credit is not good. Not that I don’t think people should have a credit card–they can be helpful in building credit. That being said, however, it is imperative you pay off the card immediately after using it so there are no finance charges, and be sure there is no annual fee. Responsible use of a credit card not only builds credit, but also can garner reward points or airline miles. In fact, my wife and I were able to obtain a brand-new big-screen TV courtesy of the reward points we received from using our credit card–all at no cost to us since we always pay off the card as soon as we use it.
Debt is usually bad if the item being purchased is a depreciating asset. When purchasing an asset that is expected to appreciate in value–a home, for example–it can make sense to carry a mortgage. Of course, any asset or investment carries some risk, so it’s important to analyze any purchase before deciding whether debt makes sense.”
– Christopher Kimball, CFP; President and CEO of Christopher V. Kimball Financial Services LLC
“When faced with making a financial decision, there is a range of emotions attached that can skew our ability to think and act rationally. Ask yourself, “By going into debt, will I be able to accomplish my long-term goals?”
Think of accruing debt as moving backwards toward your goal. It is an anchor that will slow your wealth-building potential. Are there times that moving backwards can help you reach your goals? Absolutely! But, the decision to acquire debt needs to be intentional and have your long-term goals in mind.
In a majority of cases, people are simply trying to justify their need for instant gratification by classifying their spending habits as building “good debt.” Examples of this include opening up 0% credit cards so they can buy a new sofa or go on a much-needed vacation, acquiring a home equity loan to hide cash flow issues, and acquiring retirement loans so they can live now and worry about the future later. All three of these are bad ideas, unless the decision to do this is with controlled intention (not on a whim) and will help you reach your long-term goals.
The key step to evaluate if the debt is good or bad is simple: determine your Why.
The Why is the real reason you do what you do. When your Why is strong enough, you will be able to live with intention, control your spending behaviors and stay on track. If married, your Why needs to be aligned with your spouse. A third-party can provide objective feedback since they aren’t emotionally tied to your decisions or goals and ideally would be consulted prior to considering debt.
When the opportunity to acquire debt presents itself, review your Why and determine if going backwards will help you accomplish your long-term goals.”
– Coach Dave, Financial Coach, Coach Connections
“No debt is good, but some is often necessary. The best debt, when necessary, is for something that benefits one on a long-term basis, such as a home mortgage. An auto loan is an example of debt that one’s situation may require out of practicality or necessity. This could be considered good debt. Bad debt is debt incurred buying things that one neither needs nor can afford.”
– Rob Drury, Executive Director, Association of Christian Financial Advisors
This is all-around great advice from the experts. Here’s a round-up of points that I want you to take home:
- Will the debt help you make more money now and in the future?
- Looking back in 10 years, will the debt be a good financial decision or will you potentially regret it?
- Figure out your Why and your priorities become more clear.
- It doesn’t matter if it is “good” or “bad” if you can’t afford it.
- “To a wise steward, any debt could be good.” – Chris Miles
- If it doesn’t make dollars, it doesn’t make sense financially. Crunch the numbers like Bill Mullen points out.
The reason that I cringe when I hear this question is because most of the time, this question is asked by someone who wants a shortcut. Someone wants to get rich quick, escape their money troubles, and create this amazing life in the blink of an eye…
But that’s not the way to do it.
The way to do it is still the same: build the foundation, get out of debt, learn what you need to learn, build some momentum and only then should we talk about more advanced strategies such as using leverage or other forms of debt to get ahead.
Do I believe debt can be a great wealth-building tool? Absolutely. I have a lot of friends that are now making millions in real estate… but the thing is that they didn’t start out leveraging themselves to the hills.
The rich often use other people’s time, effort and money to help them ramp up their wealth even quicker, and that is a great goal to get to… but again, build that foundation first.
Although it’s not as cool to say that it takes a little time, you’ll be happy if you take a structured and strategic approach to building your wealth. One step at a time will make you a multi-millionaire.
Listen to these experts and you’re one big step closer to your goals…
Take control. Make money. Live wealthy.
- Glen Craig, Publisher, Free From Broke
- Bill Mullen, Investor Coach, Mullennium Finance LLC
- Chris Miles, Cash Flow Expert and Founder, Money Ripples
- Christopher Kimball; President and CEP, Christopher V. Kimball Financial Services LLC
- Coach Dave, Financial Coach, Coach Connections
- Rob Drury, Executive Director, Association of Christian Financial Advisors