I’ve read in a lot of places, from mainstream media to little bloggers like myself, about how debt is such an evil thing and I wonder how our financial markets would’ve fared if the concept of debt and leverage never existed. We wouldn’t be as prosperous as we are now, that’s for sure, because debt is not a bad thing! In fact, debt is a good thing. It allows you to do some of the things you might otherwise not be able to do, such as buy a house, go to college, and buy a car.
However, like many things in life, it’s good in moderation and when appropriate. I don’t think anyone can make a good case against getting a mortgage and buying a house (though I have tried ). I also don’t think anyone can make a good case against going to college (again, I’ve tried ). However, anyone can make a case against using a credit card and carrying a balance so that you can keep your three a day Starbucks habit. That’s where the moderation and appropriateness tests come into play and that, also, is up to your own personal preferences.
Ultimately, debt is important because allows you to do the things you want to and should be doing. It allows you to leverage some of your future in order to enjoy something now. While you can’t buy a home outright, you can still enjoy it while paying a fee to do so (interest). The only problem is that you can’t leverage the future so much that when it does come, and it will, you find yourself struggling to keep up. That’s why you must exercise moderation.
Appropriateness is a matter of personal opinion but even if you fail this particular test, being moderate in your debt accumulation will leave you in a good enough situation that all won’t feel lost. So you go through life spending on transient things, let’s say you go to movies all the time, and rack up a little credit card debt. While you have nothing tangible to show for the debt, if it’s kept in moderation it’s not something that will be a life changer. A few thousand dollars of credit card debt, while still bad, isn’t something that will play with your psyche… twenty thousand dollars of credit card debt will require much stronger fortitude to overcome.
So, don’t approach the idea of debt as something that’s evil and loathsome, think of it like a tool that can cut both ways and use it with care.