Good Debt vs. Bad Debt = Same Difference!

Today I had a crown lengthening procedure done on one of my teeth. For those of you who don't know what that is (I had no idea until my dentist said I needed it), it's when they cut your gum so that they can push it down to expose more of the tooth. In my situation, they had to do it so that they could place a permanent crown on that tooth and they just didn't have enough tooth to latch onto before this operation. The lesson I learned from this entire experience is to take care of your teeth! This kind of stuff is not fun! Although I'm not in any major pain, I am very hungry. I had to watch my family eat this delicious pizza for dinner while I tried to consume some really soft spaghetti noodles. Anyway, I can't wait till I fully heal up and can get back to my regular diet (mmmm....fatty foods :))

OK, I know the opening of this post does not relate to the title whatsoever but I swear I'll get to the point. I was at Walgreen's today waiting for my pain medication to be filled, so I decided to peruse the book/magazine section. (By the way, I haven't taken the pain meds yet...yup, I'm that tough.) After gazing at the massive selection of romance novels and diet books I came across the one personal finance book. That's the one I decided to pickup. I realized that I haven't really been reading other personal finance books since I've started my blog. But it's always good to continue to learn many different perspectives on this subject as there are often several nuggets of knowledge you can find in every point of view. As I skimmed the book for the highlights, I came across a chapter labeled "Good Debt/Bad Debt". This really caught my eye so I decided to read that section specifically. Sometimes you need to read other people's perspectives and compare them with your own thoughts/principles. With this topic, I had some major disagreements with their message. So, when I got home, I did some additional research on the subject by looking at other personal finance sites/blogs. It was very interesting to me that this topic was addressed by so many others. Although, I did find one blog where they pointed out that this was probably the "old way" of thinking.

The definition of good debt vs. bad debt is probably exactly what you're thinking. A lot of people think that having a mortgage could be good debt because you get to own your home. Many more people think that student loans are good debt because it opens doors that wouldn't be open if you didn't possess a degree. I think the other big bucket for "good debt" is small business loans for starting up a business. The thought here is that it enables you to get your business off the ground. Assuming the business is successful, you should be able to payback the loan relatively easy and fast. Conversely, bad debt is predominantly related to credit card debt. It also refers to debt associated with items that traditionally depreciate (i.e. cars and boats). Those are the most common forms of "bad debt" and I actually think most people think of debt in terms of the bad stuff. After reading up on this good debt/bad debt distinction, I realized that I USED to think like that! Actually, it wasn't that long ago. All of my good debt was justified in my head and apparently I had a lot of "personal finance experts/gurus" agreeing with me. No wonder I didn't see anything wrong with my situation!!!!

Based on my real-life experience (and I think many "experts" are starting to say this now too), there's no such thing as "good debt". ALL DEBT IS BAD!!!! When you have debt, that means you owe someone else something. When you have debt, you can't really call the thing you bought "yours". When you have debt, it's very difficult to have positive net worth or build wealth. This is probably one of the most important things to truly believe as you go through your debt free journey. You must hate debt and I mean all debt. It should piss you off even if you have a cent worth of debt. Don't get mad at the credit card companies or big banks or even the government...you need to focus your hatred towards the debt as your goal should be to get rid of it as soon as possible!!!!

To illustrate my point on the fact that there's no such thing as good debt, let's look at 3 very real scenarios:

Mortgages - Over the last couple of decades, one of the American Dreams has shifted from "owning a home" to "mortgaging a home". The problem is that the great majority of folks didn't see a difference in those two phrases. Since most people equated owning their home with obtaining a mortgage, that was the thing to do. At first, it was very common to get a 30 year fixed mortgage and come up with the 20% down payment. But then, both the government and big banks really made things easy for people to get into homes by offering many different types of mortgage flavors. No one thought there was anything wrong with this since it enabled a huge amount of people to "own a home". Obviously everyone knows about the mortgage industry's collapse so I won't talk about that here. But the one thing I will say is that the phrases owning vs. mortgaging your home works just fine....if home prices continue to rise. Actually, if you looked at one of my definitions of "bad debt" above...it's when purchased items depreciate. Hello, that's what houses are doing now! Bad Bad Debt! But I'm not saying that mortgages are bad debt just because of the recent collapse. I'm saying it's not a good debt anytime! I mean, look at the first example I gave (the 30 year fixed mortgage). Just think about that product's name for a minute. Do you realize that if I entered into a 30 year fixed mortgage today, I would be 65 years old when it was finally paid off. Talk about killing your dreams! That means I would have to commit to living in the exact same place for 30 years (way after all my kids have left the house) and probably put off many of my other dreams like starting a business or possibly being able to save for my kids' college education since the mortgage payment is typically the largest monthly expense in all your bills. I just read an article about this elderly woman who was about to be kicked out of her house for missing her last payment. And I mean the last payment on a 30 year mortgage, that's payment #360. Can you imagine living in your house for 30 years and missing the very last payment (she was ill and in the hospital and trying to catch up on medical expenses)? The bank just about foreclosed on her. If that doesn't make you realize that you really don't own your home until you fully pay for it, then I don't know what will. My thoughts on mortgages is that you should avoid them at all costs. If you don't have one now, don't get one and continue to rent until you can afford to fully pay for a place to own. If you are unfortunately in a current mortgage, do everything possible to pay it off ASAP!

Student Loans - I understand the theory around why this type of debt could be considered good. Basically it will allow you to make more money in your lifetime....but at what cost! Just to make it real, I'm almost 12 years out of college and I am still paying off my student loans. Unfortunately, I don't believe I'm the exception to the rule. Now, I could just become pissed off at all the "rich kids" that had their parents pay for school and didn't need student loans. Or I could blame my parents for not saving money for me so that I didn't have to take out these loans in the first place. But when it comes to debt, I have decided that there's no one's fault but my own. I absolutely agree that going to college is not only a fun experience (Go Cougs!) but it does enable you to demand higher paying positions as well as open doors to opportunities you may otherwise might not have known about. However, if I were to do it all over again, I wouldn't go in debt for it. I would apply for grants and scholarships like crazy. I did receive some free money but I could've put in a lot more effort and secured much more. And if I couldn't get all the money for free, I would work my butt off to earn the money needed to obtain the degree. Student loans are just like all other debt, you are enslaved by it until you finally pay it off. And the other major issue with student loans in particular is this notion they they are associated with such low interest rates. I fell into this trap, it's when you tell yourself that you should go ahead and pay off your higher interest credit cards first or you should put your student loans in forbearance so that you can qualify for a mortgage or car loan. But guess what, the debt just doesn't go away and it sticks around for a long, long time if you never prioritize to pay if off. There will always be something, that's why I still have mine outstanding all this time....and mine is only for my bachelor's. I can't imagine what some loan balances are for master's students or worst yet, doctors. My stance on student loans is that they should be avoided just as much as all other debt. I feel pretty good knowing that my kids will either pay college via grants/scholarships or the college funds that I will have ready for them.

Business Loans - I think this last form of "good debt" is the least common. Although one of my dreams is to own my own business, many people don't share that same dream. Nonetheless, you don't have to strain your brain imagining how horrible this form of debt can be. Just look at the percentage of businesses that "make it" (it's very low). How easy is it for them to repay these loans? Now I know that many businesses need start up capital to begin but I think a smarter way to go would be to find investors as opposed to creditors. Besides, if your business idea is good, there should be some wealthy people out there willing to invest in it. The other approach one could take (it's what I'm planning on doing) is to raise the capital yourself. This way, my business will not start out with debt and it's my hard earned money that funded it. I think this gives you more skin in the game too. It hurts much more to lose your own money than what you perceive as someone else's money. If it take you "x" number of years to save the money to start the business, you're probably going to do everything in your power to make it work. Again, this is my approach and a valid reason why business loans are unnecessary.

Whoa, I wrote a lot tonight. It was crazy, I sat down at the laptop about an hour ago and have just been typing away. I guess when you are really passionate about something, it's easy to talk about it. Please forgive any grammatical errors or run-on sentences, I'm too tired to proof read all of it tonight. Hopefully it all makes sense :) If you only took one thing away from this post, I hope it's that there's no such thing as good debt!