Dough Roller on MSN Spending decided to reveal the idea of good debt as a myth. But honestly I can’t say that he proved it in his post. Actually there are quite a few flaws in his argument.
First, he says that good debt is debt for an appreciating asset, specifically a house. But if he didn’t have a mortgage he could quit his 9-5 job and run his blog. Is that true? No. Why? There are other expenses to live that are provided by his 9-5 job. First medical insurance. Yes, maybe it’d cost him $X mortgage dollars less to live, but with employer provided medical insurance for his family, what would that cost? Second, property taxes and repairs never go away. The cost of running and maintaining a house never goes away. It’s a perpetual thing that increases in most cases. Why? Well as you get older you may not be able to “do it yourself” for repairs either and we all understand why elderly get an exemption on property taxes until they sell.
Second flaw is that all debt is bad. So let’s take away all mortgages from the world. Let’s make everyone pay cash for a home. Let’s let everyone pay cash for college. What would happen? We’d have a caste system society in which it would be very difficult to break out of. I would be renting, and most of my readers would be renting as well. We might be lifelong renters actually because we could never afford to own.
Going to college? Not going to happen. Anyone who took out a loan might as well kiss education goodbye. Now the poor might still improve because typically grants are in place to help the very poor. But the middle class? Well if your parents are saving to buy that house cash, perhaps college is definitely not in the cards.
Truth is that debt is just debt. I don’t know if you can really classify it as good or bad. Is a car loan bad? Maybe or maybe not. You need a car to go to work. You borrow $2k to buy a beater because you have no money. You go to work and pay off the loan in 1 year. Bad investment and bad debt? Or good investment in getting and keeping a job?
You take out $10k in student loans but move from poverty to a middle class lifestyle by getting a college education? Bad debt or good debt because you’ve improved your contribution to society and no longer are dependent on government handouts? By the way this has happened in my own family so it does happen a lot!
You take out a mortgage of $25k, 30 years later you own your home outright. It’s worth $300k instead of $30k. Bad debt becuase you borrowed, or good debt because you have created a stable living environment for your family? This was my mom’s first home purchase and my in-laws. This is the house you raised a family in no less.
Medical bills charged on a credit card? Bad debt or good debt because you got care you needed? Bad debt because you can’t afford to pay it? Or good debt because you were trying to manage the payments?
I think that debt is best characterized by the person taking it out. How they value or perceive the loan. It’s not necessarily bad or good, but it depends on the purpose and reason behind it. Everyone who automatically labels debt bad, hasn’t been put in the position of needing a loan.
They may have never lived without health insurance, which in this country can bankrupt you in months. And even with health insurance you can hit the lifetime limit. They might have always lived in the US and had family to help bail them out. They were not alone and without resources. Walk a mile in someone else’s shoes before you judge them.
I think debt can only be characterized by the person needing it.
15 responses so far ↓
1 It's Only Money // Jun 10, 2009 at 12:08 pm
I think that link to MSN is bad.
2 It's Only Money // Jun 10, 2009 at 12:14 pm
Whoops. I stand corrected.
3 JoeP // Jun 10, 2009 at 12:53 pm
The only way I can see debt as a good thing is if your debt service charge is low, and you can use some of the extra cash for investing. For example, it probably doesn’t make too much sense to pay more toward the principal of a 3% HELOC if you can get direct that extra cash into a mutual fund making 7%. Of course, you’ll need to work the numbers and account for taxes.
4 Meg from FruWiki // Jun 10, 2009 at 1:29 pm
I don’t think there is anything as good debt. It’s never good to be in debt. When I look at my account balances, I don’t see “good debt” and “bad debt”. I see money that I owe, interest accruing, and the names of companies that have treated me far poorer than I deserve as someone who has never even missed a single payment. (Sure, I’ve made mistakes, but I’m already paying interest — no need to give me the run-around.)
However, I think there is such a thing as USEFUL debt. I do enjoy living in a house rather than renting — especially because renting a similar place would cost more than we pay for our mortgage, insurance, and taxes. (Trust me, I’ve looked.) Of course, we’ve spent a bit making improvements, but we’ve enjoyed the freedom to make improvements that we couldn’t have if we were renting — and which we’d never see a penny back from.
I think where people get into trouble is when they use “good debt” or even “useful debt” as an excuse to get into debt when they don’t have to, or get into more debt than they should. Just because student loans can be useful doesn’t mean you should max them out. Just because owning a house is seen as “The American Dream” doesn’t mean that you SHOULD own a house — or a house you can’t afford the payments for (or can only “afford” if you eat crap, don’t buy health insurance, don’t have an emergency fund, don’t save for retirement, etc.).
5 LAL // Jun 10, 2009 at 3:13 pm
Meg and Joe, good points. I hadn’t even considered when you have debt but it costs less than you could earn in a bond fund or something.
My after tax rate of our mortgage is 3%. But like I said I like where I live.
6 kemkem // Jun 10, 2009 at 5:06 pm
I do believe there is good and bad debt. I grew up in a part of West Africa where there is virtually no such things as loans and certainly no credit cards!, not for mortgages, cars etc. Most people can’t afford the deposit on even a rental apartment, of course no car, so you ride the bus (which is a term l use loosely ‘cos it’s not unusual to have 60 people stuffed in a bus meant for 20!) No regular food, no proper schooling..etc..etc.. It’s a vicious cycle that people can not break from and the rich keep getting richer. We are truly lucky and spoiled here. Even a poor person here has the opportunity to use debt to better their lives, it happens every day! Sometimes we forget that. Yeah.. some people abuse the privilege, but there are always the rotten apples in the barrel.
7 Inkstain82 // Jun 10, 2009 at 11:07 pm
Work from the moment you are 16, save every penny, and you can afford a state school with no debt pretty easily.
Of course, any system that depends on the responsibility of 16-year-olds is a doomed system.
8 Imee // Jun 11, 2009 at 5:04 am
True, true. And I like Inkstain82’s tips–people should be responsible already at a young age, on money or otherwise. After all, it’s hard to teach an old dog new tricks.
9 LAL // Jun 11, 2009 at 10:08 am
Inkstain that is only possible if you go to a CC for 2 years then transfer. AND you aren’t supporting your parents.
Would you like to talk to my mom and uncle and aunts? Working from age 12 and putting food on the table? Damn them for not saving for college and instead paying for rent, food, medical, etc.
I guess their parents should have been able to support them better. Or maybe they should have gone on welfare.
Working at age 16 and saving it all up is easy if you parents are rich. I know, I did it. I saved my money for a car and living expenses. So did my DH.
Our parents were not so fortunate. They were busy working to support their families and paying for college and taking out some loans.
So if you are already middle class great. If you aren’t? Then what?
10 Inkstain // Jun 11, 2009 at 11:59 am
My parents were not rich. They weren’t middle class. They were pretty much straight in the middle of poverty. IF I had done what I described above, I could have gone to college with no debt. But like I said, I’m not saying everyone should be expected to do that, because you can’t expect 16 year olds to be that responsible. The system shouldn’t expect everyone to be perfect.
(Incidentally, I would have saved more money from my HS job if my dad hadn’t insisted that I had to have a car. He thought a car was something everyone should have, I would have preferred to do without and save the difference.)
If you want to start talking about meeting people, there’s my wife, who didn’t get to start school until she was 23 because she was supporting her disabled mother. If you really want to avoid debt, that’s another option.
If you work 20 hours a week from your 16th birthday on, you will have enough money when you turn 18 to afford two years of the full cost of attendance at a state school. You can save up for the last two years while you go to the first two years. If you work more during the summers, get any sort of raises, or get any sort of financial aid at all, you are even better off.
Let’s get this straight: I’m not saying this is what everyone should do. Trying to go to college without debt is hard, will force sacrifices and isn’t for everyone. But I do think it’s important to acknowledge that it can be done.
11 Inkstain // Jun 11, 2009 at 12:06 pm
Actually, I’m going to revise the above sentiment. Schools are getting a lot more expensive than I realized, and I haven’t even been out that long.
If your parents can’t afford to take care of your most basic needs (food, shelter, clothing) without you working until you are 18 (in 2009, that is, not necessarily in a hypothetical past), there should be plenty of government programs to get them there without you having to work for it.
$7 hour X 20 hours a week X 52 weeks a year x 2 years x 12 percent taken out for taxes x 2 percent interest =
$13,040 saved up after two years.
That’s getting you maybe a year and a half these days.
12 Frugal Urbanite // Jun 11, 2009 at 2:05 pm
“because you can’t expect 16 year olds to be that responsible.”
How about ‘because we shouldn’t expect 16 year olds to give up their formative years and skip out on all experiences not related to their job’? There are other things to life besides just making money/avoiding debt.
I fully support the idea of working as a teen and starting to save up for college, but I dunno about everyone else, but I’d rather my kids were also able to study extra hard for their AP exams, played sports, joined academic clubs, volunteered, did church related activities and occasionally were allowed to spend their money on teen-aged fun in addition to earning some change for college. It’s not easy to do all that when you’re working ‘full-time’ (28 hours for minors in NY) because of the restrictions on the hours during the day you could work and saving every penny.
13 LAL // Jun 12, 2009 at 4:47 pm
Inkstain, I doubt without debt it possible to go anything other than a CC. Then using the extra years after 18 probably you can transfer to the regular university.
Problem is people who are poor typically do have to help their families. They need to work to pay the bills. Thus cutting into your savings of $7/hr. If you are paying for food, gas, utilities and even rent, then where’s the money going?
And Frugal Urbanite has a point. It’s a nice idea that kids don’t have to work to pay for things in life. And there is more to life than money and the restrictions of hours worked is important to note.
14 Inkstain // Jun 14, 2009 at 12:12 am
I’ll definitely concede that colleges are a lot more expensive than I thought. It might not be as feasible to pay for your own four years without any parental or financial aid as it was even five years ago.
But if you are poor enough that you need to help support your family, you are poor enough to get financial aid, so you aren’t paying for yourself entirely. I highly recommend the TRIO program, for example.
I’m definitely not arguing the idea that there’s good debt, and that college debt can fit under it. I’m just saying these things need a careful consideration of all options and facts. It’s a quick step from “Well, I have to go into debt to go to college” to “Well, it’s a good school, who cares how much I’m borrowing,” to “I’ll borrow $250k to get liberal arts degree with no job prospects. I have to follow my dreams!”
15 LAL // Jun 15, 2009 at 9:25 am
Inkstain, I definitely agree there is more financial help for poor people. But even then typically they need to take out loans because grants aren’t enough.
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