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Does Good Debt Really Exist?

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We’ve all read the articles, talked to the experts, and thought through this question in a number of different ways but still, we’re not sure of the answer. Like so many topics dealing with finance everybody has an opinion and there’s not an answer that fits everybody but we can get pretty close to a hard and fast answer. That answer is, no, for most people good debt doesn’t exist.

I know that by taking such a hard and fast stance there will be people who disagree with such a statement but I’m prepared to defend myself. Let’s look at a few reasons why I believe good debt doesn’t exist for most of us. It’s an old fashioned financial street fight.

Your House

There’s this misconception that a home isn’t like a car or a TV. A home is an investment, say the pro debt people but 2008 to 2011 proves that no investment is a good investment if the money can’t be reinvested in to something else that makes money. Even if your home is worth more now than when your purchased it, unless you can get to that profit and reinvest it in to something that makes money, your home hasn’t appreciated at all. Could you sell your home for its appraised value and how would it be on the market? Unfortunately, all of us who have never missed a mortgage payment are competing with the large number of beautiful foreclosed homes listed at bargain basement prices. (Luckily, that trend is starting to subside)

The only way we could call your home a good debt is if you didn’t live in it and you were renting it at a profit or showing positive gains by buying properties cheaply, fixing them up, and selling for a profit. If you’re living in your home, it’s an expense and for most people the expenses of their home are higher than the appreciation of its value.

Are you rich?

Some investing professionals who have a high net worth borrow money at a low interest rate and invest it at a higher rate. An example of this may be an investor who borrows money at 4% and invests it at a rate of 6%. A consumer may take out a home equity loan to make repairs to their home instead of tapping their fixed income investment accounts because their investments are making more money than the interest rate on the home equity loan.

This could be considered good debt but for the average nonprofessional investing, consumer strategies like this are best left to the pros and unless you are of high net worth, the spread between what you’re making and what you’re paying isn’t enough to warrant the trouble. In this example, 2% profit would be lost when a financial advisor is compensated for setting it up and maintaining the investment. Of course, some consumers could do this on their own.

You’re Not Stable as You Think

Go to a mall or walk down the street of your city or town and ask nine random people what they do for a living. Statistically speaking, at least one of those will tell you that they’re unemployed and actively looking for a job. They will most likely tell you that they didn’t see this coming and they can’t believe the turn that their life has taken. They may be highly educated and were living a comfortable middle class lifestyle prior to being laid off. Now, they can’t meet their debt obligations.

No debt is good debt because you never know what life will throw at you tomorrow. Your life could drastically change but your obligation to pay back your loans will not. Take some time to add up your debt obligations and ask yourself what kind of life you would be living if you didn’t have so much of your money going to debt? Sure, you need a place for your family to live so a mortgage may be a necessity but how much faster could you pay off your home if you didn’t have so many other debt obligations? The average United States consumer debt is currently more than $43,000 per person which means that each American has a debt load of 122% of their income. (Read more here)

The most dangerous aspect of debt is that it has become a lifestyle so engrained in our society that we forget that wealth is built by getting paid more but also being smart about our spending and buying what we can afford.

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9 Responses to “Does Good Debt Really Exist?”

  1. Steve says:

    You make some valid arguments but you are only talking about mortgages. What about the other so-called “good debt”s?

  2. cvargo says:

    Student loans people consider as good debt because you invest in your future. As a recent graduate honestly I wish I didn’t take out as much, it seems so nice you have no payments, no interest while in school, and you don’t have to make a payment until 6 months after graduation….. then BAM there are the bills, big eye opener for how much that 4 year degree cost you then.

  3. daenyll says:

    for undergrad I took the max of what was offered in terms of subsidized loans and put the excess after tuition and living expenses in CDs( at the time making 3-4%) as an emergency fund, I’d had a work study job that covered basic expenses, and took a co-op position one semester and put most of those earnings aside as well. When grace ended I had that money to put right to repayment despite not having yet found a job and applying to graduate schools.

  4. Fred Mertz says:

    My net mortgage payment is less than I would have to pay for rent at current market rates. So how exactly is that bad debt?

    • Sun says:

      There is this nasty thing called interest. It can be tax deductible, but you’re only getting maybe 30 cents on the dollar as a benefit? $100 paid, $30 in tax write off.

  5. Nate says:

    That is a good question to ask ourselves….what are our obligations. We keep hearing this same term–”Good debt,” but I don’t think it’s so much as that there’s good debt as that sometimes there’s debt that’s probably necessary because we can’t do it any other way and it can prove to be a good ROI.

  6. Alex says:

    A house is first and foremost, shelter. The cost of the mortgage payment is only part of the cost of home ownership. When we bought our house 30 years ago, my father told me to plan on saving the equivalent of 1/2 the principal amount for home maintenance. After painting, rewiring, replacing carpeting (twice)/furnace/AC/water heater (3 times)/privacy fence (twice)/roof replacement (twice)/external painting/internal painting, window replacement, building and maintaining a deck, annual landscaping costs, I think that whatever gains we could have are eaten up by maintaining the investment. Certainly, if we rented, we would have more flexibility in moving, more disposable income, and would be able to take jobs where less income would be less of a factor. So far, the only advantage I can see in home ownership is that banks are willing to lend you more money.

    What I see as good debt is debt at a lower rate of interest than other forms of debt. For example, I borrowed against my 401K to pay off credit card debt. At 4%, it’s much cheaper, and by making the same $$ amount payment that I make to credit card companies, I can pay off the loan against my 401K in ten months — far less time than making credit card payments. I have an annual savings rate of 15%.

  7. govenar says:

    0% credit card, >0% savings account; you don’t really need to be a professional investor for that


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