Debt caused the 2008 Housing Crisis and recession. Debt is why thousands of students are drowning in student loan costs. Debt is the cyclical, eternal credit card balance hanging over your head.
What is Bad Debt?
Debt caused the 2008 Housing Crisis and recession. Debt is why thousands of students are drowning in student
loan costs. Debt is the cyclical, eternal credit card balance hanging over your head.
When people think of debt, most people inevitably have a visceral adverse reaction. Debt is a huge source of stress
Right now, in America:
26% have debt in collections, so they’re harassed and reminded of it constantly.
13% have medical debt from what is likely a challenging period in their lives, and medical debt loads are
8% of student loan holders are in default.
4% are delinquent on vehicle loans, and 3% are late on credit card debt.
Does this mean that all debt is bad, though?
Good debt sounds like an oxymoron, but it isn’t. Good debt is any debt that somehow improves your life
circumstances and financial standing.
What are some examples?
Mortgage debt: almost no one can afford to buy a house with cash, so mortgage debts are inevitable. This
debt is invaluable because real estate is one of the only remaining reliable methods of building
generational wealth, especially as the stock market wobbles and inflation surges.
Business debt: Starting a business isn’t a small task or cheap, so taking on some debt to fund the
beginning of a new venture is critical to later success. Luckily, banks are usually wary about small business
loans, so they’ll work with you to ensure your business plan is viable and the debt will be used well.
Education (sometimes): Even though college isn’t the be-all-end-all it used to be, a clear goal and job
prospects after graduation can make education and student loan debt an investment in your most
precious asset – yourself.
Good debt sources are few and far between – there aren’t many more for the average American beyond those
Bad debt, though, is pervasive and omnipresent. Bad debt compounds quickly with limited ways to repay with the
asset it bought. In other words, it’s best to avoid debt for purchases that depreciate or go down in value. Contrast
this with real estate that appreciates and generates returns to offset the debt load.
Car debt: everyone wants a nice new car – I’m the same way, and shopping for a used car can be tricky
and exhausting. But vehicles lose value as soon as you drive them off the lot, so you incur a high debt load
for a rapidly depreciating asset. Car notes are especially troublesome for buyers with little or poor credit
history, as high-interest rates compound the total debt quickly.
Credit card purchases: Most credit card purchases that add a massive debt load are for items that have
zero value after the purchase, like clothes, outings, and entertainment. High-interest credit cards can
make a night out on the town a payment you’re saddled with for months, so it’s always best to manage
credit card purchases carefully and choose debit or cash when able. Some credit cards have great
rewards programs, so if you go this route and maximize rewards, it’s best to budget closely and pay off
the card every month before interest builds.
Debt to repay debt: This is a vicious cycle, and many rotate credit cards with zero-interest introductory
offers to pay off other cards. This is very dangerous, as you can quickly lose the bubble on total debt and
see it balloon faster than you can manage. And, if you have too much debt, you won’t even be able to
qualify for additional loans to pay it off! Truly a trap to avoid.
While some debts are invaluable in developing your financial standing, most debts should be carefully avoided. Life
is stressful enough, especially when you’re young and vulnerable
In the first part of this series, we looked at the overall benefit of hiring a financial advisor and determined that most people would benefit from hiring one. Since financial advisors can manage nearly all aspects of money and finance management, there is a good chance you would benefit...