Smart SpendingSmart Spending

The myth of 'good' debt

All debt takes its toll.

By Karen Datko Oct 6, 2009 2:21AM

This post comes from partner blog The Dough Roller.


You've probably heard of "good" debt and "bad" debt. Good debt is when we borrow to buy something that generally goes up in value, like a home. Bad debt is when we borrow for anything else, like a car, a boat, a meal, a dress, a cruise, a wedding and so on.


Many teach that good debt is fine, while bad debt is not. The theory goes that good debt makes us wealthy as the value of our purchased assets goes up, while bad debt makes us poor as we struggle to pay debts for which we have little to show. In fact, it's a philosophy I've followed my entire adult life.


And it's flawed.

Not all debt is created equal, to be sure. A debt backed by an appreciating asset is far better than debt used to fund a lifestyle we can't afford. Why? If for no other reason, we can always sell an asset to pay off good debt. With bad debt, all we have is the debt.


But the problem with good-debt versus bad-debt thinking is that it makes good debt seem more appealing than it really is. And there are two reasons for this.


First, debt, whether good or bad, takes away some level of our freedom. In my case, I'm 42 with enough good debt for two families. If I were debt-free, I could quit my day job and run my site full time. I'd really enjoy that, along with a few other business ventures I'd undertake. As it stands, my good debt is requiring me to keep my 9-to-5 job. Thus, good debt is preventing me from living the life I'd like to live.


Second, selling the assets that underlie good debt is not always practical. For most of us, good debt is our mortgage, and that's true for us. We have a mortgage and a home-equity line of credit used to renovate our home several years ago. We could sell our home, even in the current market, and pay off all of our good debt. We would have enough money left over to pay cash for a home in many areas of the country, but not where we currently live outside of Washington, D.C.


It's certainly a choice we could make. We would uproot our two high school children, sever all of our friendships, and leave many of our family members behind. We've chosen not to do that, and that's the right choice for us. But that just brings me back to all of our good debt.


Borrowing to buy a house is a perfectly rational decision. In our case, perhaps we purchased more home than we needed, although we do enjoy where we live. But the fact remains that good debt, at least for individuals, is a myth.


Instead of good debt and bad debt, maybe we should just think of it as debt and bad debt.


Related reading at The Dough Roller:

Published June 5, 2009
5Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More