Is there such a thing as good debt?

What’s the difference between good debt and bad debt?

There is good debt, and there is bad debt.

I’m sure you’ve heard that before. The idea is that if the debt is going towards an asset that will appreciate — increase in value — then that is good debt. If it’s going towards something that will depreciate — lose value — then that is bad debt. Mortgages and business loans? Good debt. Car loans, credit cards? Bad debt. That’s what they say.

Many people place student loans in the category of good debt because the theory is that by investing in your education, you will reap the benefits of a higher earning potential. And you’ll pay those student loans off lickety-split with the awesome income you’ll be making at the fabulous job you’ll get right after graduating. That is the theory.

But there is a problem with categorizing debt as either good or bad. In fact, there are a few problems.

Problem #1: We confuse what we’re investing in

We throw the word investment into the equation, and that complicates things. We say taking out a mortgage or student loans is an investment in our future, but we get that wrong.

The EDUCATION is the investment — not the student loans we take out to pay for the education. The HOME is the investment (and even that is debatable according to Robert Kiyaske’s Rich Dad, Poor Dad) — not the mortgage we use to buy it. The BUSINESS VENTURE is the investment — not the debt associated with it.

We need to separate the investment from the debt. We talk about them like they’re the same, but they’re not. You can pursue an education and purchase a home without debt (albeit challenging). So we need to be clear about what the investment is.

I recently bought a home — with a mortgage. After seven years of being 100% debt-free, I am now back in debt. But I don’t see the mortgage as an investment or as good debt. It’s just debt. And I hate having a home loan just as much as I hated having student loans, a car payment, and credit cards.

Problem #2: Good debt has no guaranteed returns

Another problem with seeing good debt as an investment is we act as if the “investment” of debt has guaranteed returns. Unfortunately, that is not the case.

There is no guarantee that a business will succeed. There is no guarantee that a student who takes out student loans will:

A: complete their college education
B: get a job in the field they studied
C: remain in that field to justify the debt.

There is no guarantee that the house I just bought will appreciate. Sure, the value will likely increase over time, but that isn’t a sure thing. And because home values fluctuate, it certainly isn’t a guarantee that the value will be higher at the time I choose or need to sell.

Talk to anyone who needed to sell their home after the 2009 recession about counting on increasing home values. I’ve shared how I had to short-sell my house after the crash — for roughly half of what I paid for it. 🤢 Sickening.

We do ourselves a disservice by playing up certain types of debt as an investment. Purchasing stocks is an investment too, but there is a reason stock market loans aren’t a thing. Sure, someone somewhere has borrowed money to invest in the stock market, but the risk of going that path is very apparent. Most people instantly recognize it as a bad idea. There is risk in “good debt” as well.

Problem #3: We give debt the green light as long as we can say it’s good debt

The decision to borrow money is personal, of course. After experiencing how debt robbed my freedom and dictated my professional and personal choices (like when to have kids!) for many years and after taking the two-year journey to pay it all off, I committed not to borrow money again except for a mortgage.

I’m not here to convince you to do the same. But I do want to warn you about the danger in compartmentalizing debt as good or bad. When we do that, we give borrowing money a “thumbs up” as long as it falls in the “good debt” column.

We then start justifying poor choices, like purchasing a home before we’re ready, because, after all, a mortgage is “good debt.” Or we send our kids to colleges we know we can’t afford because it’s an investment in their education, and “they’ll be able to pay off those loans within a year of graduation.” Or many other choices we make all in the name of good debt.

Once we go down that path, we end up on a slippery slope and starting saying and believing things like taking out a car loan for a particular make car is pretty much good debt, because those cars “hold their value.” Spoiler alert: no car holds their value!

Debt is debt

Good debt vs. bad debt is not a new debate. This is simply my take on it. Debt is not an investment. Debt is debt. The house, the business, the education, the whatever is the investment — not the debt. Don’t confuse them.

What’s your take? Do you agree debt is debt? Or do you swear by “good debt” and “bad debt?” Why? I know not everyone is with me on this one. And that’s okay. We can still be friends. 😉

1 Comment

  1. James C Hendrickson

    Actually, you raise a couple of really good points regarding good debt vs. bad debt – another issue I’d say is America often has a pro-debt mentality, people assume its cool to go into debt to get a car, have a wedding, have children, go to college, etc.

    It’s not clear to me that the situation is going to change until wages catch up with inflation.


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