Recently, I had a lengthy conservation with a good friend of mine who had a ton of basic personal finance questions contained within. I thought it might be interesting to start an irregular “Your Money 101″ series to answer and explain some of his questions.
The majority of people out there make broad statements like debt is bad period. Over the last couple of years, I’ve come to learn that not all debt is bad and that’s the truth. There are many cases where debt can actually be a good thing. Yes you heard me. 🙂
Here are some examples of situation where debt is actually good:
Debt with very low interest rate or no interest. Any time you can get debt with an interest rate below 4%, it’s a good deal. If nothing else, you can literally take that money, put it in a high-interest savings account, and turn a profit.
Debt that allows you to acquire an asset that won’t immediately start depreciating. This means that when you go into debt, you’re acquiring something that will hold its value. This usually means buying a home; even real estate at times doesn’t fall in this category, as it can be quite unstable.
The reason people claim that debt is bad is because in the vast majority of situations, it is bad. Why? For starters, you are a huge risk. Think about it for a moment: how often does “something†come up and you “have†to spend more money? Ever had an unexpected life event occur and drain all your funds? Ever wished you could change jobs – or even taken the leap and done it? These are all examples of risk that you introduce into life little mixes.
In a nutshell, the only debt that’s worthwhile is debt to own a home and debt which you can directly use to earn more. Otherwise, it simply isn’t worth the risk.
