Many years ago, debt was hard to get and was considered a dangerous and risky thing to have. Now it is so easy to come by, that possessing debt is almost universal. In fact, in 2008 the easy access to debt got our country into a bit of trouble, causing the housing crash. Today, if we want something that we don’t have the money for, (also known as something we can’t afford) we just borrow the money and buy it anyway. It doesn’t matter that we can’t afford it. All that matters is that we can afford the payments.
Once debt became universal, Americans wanted to remove the stigma of accumulating debt. We didn’t want to feel guilty about buying a car we couldn’t afford. So along came the concept of “good” debt and “bad” debt.
But all debt works against our wellbeing. If we use debt to purchase things, we need to earn extra money this year to pay for the things we bought last year that we couldn’t afford. Debt from last year takes away from what we can afford this year. The principal and interest of each debt that was acquired in the past must be paid out of our current earnings. If we can’t make the payments, someone will come along and take back the things we bought on credit. Bankruptcy is a byproduct of debt. Divorce is a byproduct of debt. Suicide is a byproduct of debt. Debt is not our friend. There is no such thing as “good” debt.
I hear almost daily about how a deductible home mortgage of 3% is a “good” debt, and the bank charging 18% on my credit card balance is a “bad” debt. Just because the interest rate is low, or deductible, doesn’t make it good, it simply makes it cost less. It becomes less bad. Less bad is not the same as good.
If something is good, then we should want more of it. Having money in the bank is good. So having more money in the bank is even better. If having a $300,000 mortgage at 3% is good, then we should want better, which would be an $800,000, 3% mortgage. But no one thinks having more debt is better. Better is having less debt. That is because debt is bad and the better position is to have less of it.
Which of these would be considered better: Winning a $1,000,000 house with a 30 year, 3%, $300,000 mortgage, or winning a $700,000 house that has no mortgage at all? I suspect everyone will take the free and clear house, even though the other option has “good” debt. That is because debt is never “good,” it is always a burden.
Sometimes we do choose to take on a burden because it will provide something else we want that is of greater value than the debt burden. Taking on a reasonable mortgage burden in order to own a house is one of those situations. If home debt is approached with the notion that the debt is “good” then there is no incentive to ever pay it off. We just keep that “good” debt around forever. But if we can see it as a burden, then we have an incentive to get rid of the burden.
When we move the debt from “good” to its more correct classification, a burden, we become motivated to rid ourselves of the burden. We begin to accelerate the debt payments. Once the debt is off our backs, we will be able to use the money we earn for current and future purchases. We are no longer paying for our past purchases and the accruing interest. Since we are now better off without the debt, the debt was not actually “good” as we had originally convinced ourselves.
Another place we might consider taking on this burden is buying a rental property. In this case, the debt allows us to put an item in our investment portfolio that will begin to grow and put money in our pockets. But too often, because the interest is deductible and the purchase is an asset, we mistakenly feel this mortgage is “good” debt.
Many real estate investors think they should never pay off their rental mortgage because it is “good” debt. It is as if they think they need the interest deduction. But in actuality, the interest costs a lot more than the deduction saves. They will be better off without the burden of the debt. So why don’t investors pay off their mortgages quickly if they are better off without them? It’s because they believe their debt is “good” debt, so they don’t make any effort to rid themselves of it.
I used debt to purchase my real estate investment properties. But, since I know this is not “good” debt, and is a burden, I have been working to pay it off sooner rather than later. Soon I will own all the properties free and clear.
I fell prey to the “good” debt mentality when I was paying off my student loans. When I got down to the last loan, which was only 3% interest, at a time when the prime rate was 8%. I mistakenly thought it was “good” debt so I shouldn’t pay it off. When I finally came to my senses and just wrote the final check, I felt a great weight lift off my shoulders. It was a small enough loan to just write a check and be done with it, yet I resisted and carried this burden for quite a while longer than necessary.
Today, I tend to only borrow money if I am buying something that will put money into my pocket, such as a rental property with positive cash flow. That means I’m using the burden of debt to improve my financial position. The debt is making me money. Then I get busy paying off the debt ahead of schedule to relieve the burden. Just because it allows me to make money, doesn’t mean it is “good.” It still has the potential to get me into trouble.
We are about to build a new house that we will downsize into now that our kids are grown. Our current house hasn’t had a mortgage since 2001. We will likely use some debt in the process, as the sale of our old house may not occur in time for us to purchase the new one when it is completed. We will likely have an interim loan until the old house sells. Then we will be back to a free and clear house. We feel the short term burden is worth the reward of trading to a smaller house.
A poor use of this debt burden would be buying a boat. In that case, not only would we be taking on an unnecessary burden, but it also hurts our financial position. The payment pulls more money out of our hard earned salary every month paying the principal and the interest on the loan. But many people would think of this boat loan as a “good” debt, if the interest was 0%, and the family can use it to have fun (as if they couldn’t have fun any other way). The debt is still a burden, even if the interest is zero. The payments still need to be made and if they are missed, the boat will be taken away.
We need to get out of the mindset that debt can be classified as “good.” All debt is bad. All debt is working against us and is therefore a burden. If we can keep this in mind, it will change the things we are willing to exchange for that burden. It is not worth taking on a debt burden to purchase a few new toys or go on a fancy vacation. Think long and hard before taking on the burden of debt. The benefit of taking on a debt burden must greatly outweigh the risk and worry that comes along with debt. We don’t need more burdens in our lives.
It is time to stop trying to manage debt and start eliminating it. No more playing games with “good” debt. Start moving in the direction of becoming debt free. If you need some more information on this, please pick up a copy of my book The Doctors Guide to Eliminating Debt and get on the right path to conquering the burden of debt.