Bad debt, good debt, and the great financial lie

Nov 25, 2008

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One of the greatest lies ever told to people is the fallacy of good debt/bad debt.

“A mortgage is good debt! It’s an investment that will pay off!”
“A college education and student loan is good debt! It’s an investment in yourself!”
“A credit card is bad debt! Stuff you buy with a credit card doesn’t increase in value!”

Let’s break this destructive lie right now.

There is no such thing as good debt or bad debt.

There is only debt you are capable of managing financially, and debt you are not capable of managing financially. Are there things you’d like to buy or invest in that have a larger probability of paying off dividends in the future? Of course. Few would argue that a college education or a house to live in are wastes of money. But implying the value of a debt is equal to the value of the investment is a dangerous fallacy. It’s one of the main reasons we’re in the financial situation we’re in now.

Which is better? A diamond that increases in value paid for with cash, or the same diamond paid for with credit? The diamond is the same. How you pay for it is the difference. To be sure, there are some things in life which are exceptionally difficult to obtain without using a debt vehicle, like a house. That said, the mortgage on that house isn’t inherently good because the house might appreciate in value. The mortgage on that house is only as good as your ability to repay it without going broke.

Before you borrow, see your financial picture clearly, and break away from the fallacy of good or bad debt.

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Comments

8 responses to “Bad debt, good debt, and the great financial lie”

Dan

November 25, 2008

Whenever someone enters into a borrower-lender relationship, something changes. The lender is in a position of power, and the borrower is in a submissive position, being required to pay the lender back.

There is a proverb that states, “The borrower is slave to the lender.”

For this reason, I don't believe any debt could be good, and I am going to do everything within my power to get out of debt and make sure I don't go back into it.

Reply
Dan

November 25, 2008

Whenever someone enters into a borrower-lender relationship, something changes. The lender is in a position of power, and the borrower is in a submissive position, being required to pay the lender back.

There is a proverb that states, “The borrower is slave to the lender.”

For this reason, I don't believe any debt could be good, and I am going to do everything within my power to get out of debt and make sure I don't go back into it.

Reply
JonathanBrowne

January 17, 2009

Thanks for this great article.

Reply
Anonymous

January 17, 2009

I think your absolutely right Christopher S. Penn. These are some of the same thoughts I have. I have a blog where I write about getting out of debt and I promote that same idea. I think that it’s very destructive for most people to ever try to “use debt as a tool”

Reply
JonathanBrowne

January 17, 2009

Thanks for this great article.

Reply
JonathanBrowne

January 17, 2009

Thanks for this great article.

Reply
Learn Forex

April 9, 2009

waw… cool! =)

Reply
Anonymous

April 12, 2009

May 4. This time frame is right Karls Mortgage Calculator before the subprime concerns came to the forefront of everyone’s attention around mid-to-late July. REM reached a high of $51.06 on June 4th, but by August it had lost 40%.

Reply