What Does Good Debt Look Like?
If you go through your whole life without being officially, legally in debt, then you will have either gotten extremely lucky or you will have been overly cautious to your own detriment.
They say money makes the world go ‘round and fortune favors the bold. Combine those two statements and you might get the idea that to live your best life, you may have to voluntarily go into debt and gamble on yourself.
But we aren’t here to tell you to stop thinking debt itself is bad and it’s really some wonderful game to play.
No, no, no – not all debt is created equal. The trick is to give careful thought to an opportunity that involves indebting yourself.
Financial experts will often say something like this: debt is good if it results in you bettering your future and gaining more than you lose. This is still a tad vague, however, so let’s try some examples.
Mortgages and Other Home Loans
Those same financial experts from above often say the single best kind of debt you can take upon yourself is a mortgage, since a purchased home will better your quality of life and, if maintained correctly, will appreciate in value. They’re not incorrect, but they’re not making a complete statement.
There are two kinds of mortgages: “buying a house” mortgages and “using your house as collateral for a loan” mortgages. The first kind is a good investment; the second kind is… well, have you ever heard how mortgage is French for a deal with death?
Of course, a more accurate translation is roughly death pledge, which is supposed to refer to the death of the agreement (which will either end in full repayment or repossession) as opposed to that of the payer.
A mortgage can be a smart move if you’re smart about it, but putting your home on the chopping block can end badly – unless you know what you’re doing.
If you’re taking out a mortgage on your house to play the stock market, and you’re actually really good at playing the stock market, then maybe you can disregard us saying collateral mortgages are a bad idea. But only if you’re really, really good at investing.
Investing, whether it’s in stocks or just paying into a project, can fit the definition of good debt since you can wind up with more money than you started with. But you can also lose all that you invested if things never come to fruition.
You don’t need to take out a loan to start investing, of course, and if you’re not a seasoned investor, you shouldn’t. But if you know what you’re doing, or if you can get the help of somebody who does, it could pay off to take on debt if you have reason to believe you can make back more than what you borrow. But be careful.
For a whole slew of reasons, there’s been a big debate over whether higher education is “worth it” anymore.
Regardless, college is still an institution in our society, and many people are indisputably better off for having attended it. Student loans may be a large burden to bear, but if you can figure out a way to pay it off (and, for good measure, reduce the cost by finding scholarships and grants), it can be worth your while.
While bothersome, if you can pay off those loans efficiently and never default, it will reflect well on your credit score, which you need to look good if you want to be able to borrow money for anything else.
Taking on debt for education qualifies as good debt because you’re fundamentally investing in yourself. There is another way to invest in yourself, though.
Want to start a business? You’re probably going to need a loan for that. Do you have a good business plan? Then that loan might be the key to your future.
Whether you’re trying to start a business or just trying to get into freelancing, the debt you take on to acquire the necessary supplies is inevitable, but it is an investment into your future and your own freedom. So, can you swing it?
Getting What You Need
If you need to take out a loan to pay for important necessities, we can’t tell you no. This debt may not be “good” in that it’s some gateway to a lifechanging opportunity, but it’s certainly not “bad” either, since it’s not reckless or frivolous spending.
Furthermore, you’re “investing” in the safety and security of you and your family.
Bad Purchases… That You Can Win
If you take on debt to purchase something you really shouldn’t be buying, it’s probably bad debt, but nothing in life is absolute.
If you can negotiate the terms of the loan to be favorable to you, or if you can take what’s usually a depreciating asset and make it appreciate, you just might be able to game the system.
Let’s take cars, for an example.
In America, many people need a car to operate in society, so buying a used car could fall under the previous category of obligatory evils. But a new car? Those financial experts we keep citing would insist you shouldn’t buy a new car – ever.
Not only do they immediately lose value the literal moment you buy it, but to pay one off, you usually have to finance it on the dealership’s terms, which will most certainly include a ridiculously high interest rate you’ll come to regret.
But what if you could get it on sale and with exactly 0% interest? If there’s ever a good time to buy a new car, that would be it.
Even then, it’s best to try to pay as much as you can upfront and get a payment term fewer than four years, but if you can swing that, you could genuinely call that a steal. If you have the financial stability to pay it off on-time, you could call that good debt for making a shrewd move.
If you want to take that car, soup it up, and somehow manage to make it more valuable than the sum of its parts and then sell it at a net gain – a tricky task, but it’s possible – then you can also chalk that up to good debt for a clever purchase.
Good Debt is Smart Debt
In the interest of full disclosure, any of the above “good debts” can quickly become bad debts if you don’t know what you’re doing. Likewise, “bad debts” could turn out favorably for you if you can pull off a plan that even the financial experts didn’t see coming.
The key is to have a clear vision with a feasible goal. If you can manage that, then your odds get better when you gamble on yourself. Just remember, however, that no matter what, you are rolling the dice.
But hey, everything’s a dice-roll in the game of life.