What’s your position on debt? Read this first


You hear it all the time, here and many other places: Debt is bad — evil, even — you know, like smoking and drinking and gambling. Yet, despite overwhelming evidence that smoking is bad for us, almost one person out of every five still smokes. And in the past year, that number has not declined significantly.

The government even has campaigns to get people to stop doing what's bad for them. Beer companies have to add “Please drink responsibly” to their ads and, in many states, gambling is flat out illegal.

People aren't borrowing enough?

So, if debt was bad for you like those other vices, you would expect your government to have some educational program to warn you of its evils, right?

Have you ever seen that public service announcement on television from the '80s about drugs? First they showed you your brain, and then they showed you your brain on drugs? (Google “this is your brain on drugs” if you never saw it.) Now, have you ever seen a similar public service ad showing “This is your budget, and this is your budget on debt?” Nope, and you probably never will.

On the contrary, during the great financial crisis of 2008, the Federal Reserve Board and the government kept justifying all those bailouts by saying people aren't borrowing enough. From that, one would surmise that debt has to have some redeeming qualities.

I mean, will you ever hear the government saying people aren't smoking, drinking or gambling enough? Look at the government itself: Ever since the Great Depression, it has been in debt and, recently, that amount of debt has climbed to alarming levels.

Debt's stunning rise from student loans

As for personal debt, a recent breakdown showed the scope of debt in America today. Total indebtedness by Americans stood at almost $12 trillion, up from only about $7 trillion in 2003, when the New York Fed started tracking this information.

The major type of debt, not surprisingly, is mortgage debt. The second-largest category of debt, though, is a surprise to many (and a concern): student debt.

The red line shows how student debt has risen in the past 10 years from the smallest category of debt to the largest non-mortgage class.

Corporate finance models and debt — the roots of fallacy

Then look at businesses. When you go to business school, one of the most pervasive things they teach you is the importance of using debt. When the du Pont family took over General Motors back in 1920, they instituted what has become one of the basic models of corporate finance, the so-called DuPont formula which essentially says, if you're not using debt, you're not managing your company properly.

If you are inclined to think that's an old-fashioned notion, consider Apple today. No corporation has ever had as much unused spare cash sitting idly in bank accounts like Apple has in 2015 (over $10 billion at the end of 2014). Yet this month, they announced they are going to sell bonds (i.e., take on debt) of $8 billion — and this is a well-run company by most people's reckoning.

Why?

What is so attractive about debt?

Actually, the debt attraction is different for different groups and people.

For governments, it started out as a means to finance infrastructure. In 1930, $35 million in bonds (debt) were sold to finance the building of the Golden Gate Bridge. Through tolls, the loan was paid off in 1971, and no tax money was ever used. World War II was partly financed with war bonds. Without that kind of debt, many schools, dams, bridges and other parts of our well-run society could not have been funded.

For businesses, the main attraction is increasing the efficiency of capital employed. If you are a manufacturer, you can build two factories instead of one — and provide jobs for twice as many people — when you add debt to the capital you already have.

For individuals, the primary attraction is timing. You get to enjoy the benefit of that thing you finance (home, education, car, vacation) before you pay for it.

In other words, debt has its benefits — or else nobody would use it and you'd see public service ads discouraging its use.

“Okay,” you might say, “so if debt is such a wonderful thing, shouldn't we be borrowing more?” Good question, and one with several answers.

The pitfall for individuals? Assessing risk incorrectly

There is no getting around the fact that, despite its benefits, debt has serious consequences — for governments, businesses as well as individuals. However, individuals seldom recognize that the realities of debt are different for them than they are for governments and corporations. After all, governments can raise taxes and corporations can decide to sell bonds or issue stock.

Aside from the fact that individuals aren't advised by an experienced board of directors, the key problem with debt for individuals is that they don't recognize how uncertain the future can be. Things may work out swimmingly for you and you may be able to repay everything on schedule — but then again, they may not.

So the higher your debt level, the higher your risk that a bump in the road — like an employer eliminating your job (or just you) for an unforeseen reason — will drastically impair your ability to make those payments. Recovering from that scenario (or one that involves illness) is often very difficult for individuals and can set them up for even more consequences.

The consequences of debt for individuals

1. Foreclosure and/or bankruptcy. The main problem with debt is that you have to pay it back (and then some). When something happens and you can't pay it back, those creditors make life miserable for you, as anyone who has gone through foreclosure or bankruptcy can attest. And in most cases, student loan debt cannot be discharged through bankruptcy.

2. More stress. Servicing debt boils down to the mantra of “making payments.” Life, though, has a nasty habit of throwing us financial curve balls, like a close family member falling ill, the car malfunctioning or the furnace going out. When events like that occur, the stress level in a household has nowhere to go but up … and the higher the debt level, the higher the stress.

3. Decreased family harmony. They say money doesn't buy happiness; but it is also true that there just is a higher level of happiness in a household where the finances are in order and the savings account is full. And the more debt you have, the less margin you have for those unforeseen events, including handling of kids' special requests and attendance of social events.

4. Undermining long-term finances. If you have debt, you pay out money for interest; but without debt, you get to save that money — and a lifetime of such savings adds up when it comes time to retire.

There is a bigger, but more subtle, thing at work too. Often, when you decide to save up to buy something, the urge to buy that thing fades. Saving up to buy something, as opposed to buying it with debt, is a great sifter of the “really wants” from the “spur-of-the-moment wants.” (Those of us who are retired have a long list of things we wish we had never bought. If you follow a policy of having no debt, chances are you will end up with a far healthier retirement balance than if you went into debt for purchases.)

5. Freedom lost. When you are loaded with debt, you lose the freedom to pursue many things. Perhaps a dream job comes along. It is exactly what you want to do, but it pays less than you earn currently. If you didn't have debt, you would have the freedom to make the jump. With debt, those payments steal your freedom.

This applies to many opportunities from vacations to investments, even once-in-a-lifetime business opportunities. A good friend of mine in California passed away recently. Because we have no debt, we have the freedom to make an extended road trip out of it to see many friends we haven't seen for a while. If we were stuck with the obligation to make payments, we would not have been able to do so.

How my position on debt changed

Looking back over my life, I fell for the business school line that debt is good. If I knew then what I know now, I would have been more like Warren Buffett and avoided debt at any opportunity (even though he, too, has been taking on bond debt on the quiet).

As the saying goes, “Those who under­stand inter­est earn it; those who don't, pay it.” Can the so-called “responsible use of debt” help you get ahead? Possibly, it can. But it is much more likely that it will help you get farther behind.

The reason is, as Circuit City found out, life tomorrow isn't as smooth or predictable as it is today. For that reason, and for the benefit of freedom, I personally believe that debt may be good for other people, but I avoid it like the plague.

Do you have a mortgage, student loan, auto loan, home equity loan, credit card debt, or other debt? Is there such a thing as responsible use of debt for individuals? Has your position on debt changed?

More about...Debt

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Income Surfer
Income Surfer
5 years ago

I largely agree. Debt has a place in a modern business. It’s role in our personal lives is a bit more dubious. Personally, I think every kid in high school should be given the graphs you showed above, and while someone explains the potential implications of such debt.
-Bryan

Beth
Beth
5 years ago
Reply to  Income Surfer

You’re welcome to try! 😉 I’ve been the one in the classroom with something like those graphs. Some kids get it, some kids don’t. Regardless of the risks, some people are going to make bad decisions anyway. If teaching alone could solve the world’s ills, no one would smoke, do drugs, drive drunk, bully, have an eating disorder or… well, you get the picture.

I do think we need better personal finance education in schools, but I also know so much more is needed.

Brian @DebtDiscipline
Brian @DebtDiscipline
5 years ago

There are some PSA’s that run from http://www.feedthepig.org/ to try and help people with debt.

My position on debt has changed over the years. I used to thing everyone has a credit card and carries a balance so we should too. Not anymore. We killed our debt and haven’t looked back.

Beth
Beth
5 years ago

Generally, I’m debt adverse but I think it really depends on the person and the situation. For instance, I had a student loan when I went back to school to get out of a career where I was underemployed and job prospects were decreasing. If I’d waited until I could pay cash, I would have been in a worse financial situation overall than if I had taken on debt and gotten myself on a better career path. IMHO, that’s different than borrowing to buy non-necessities like trips or consumer goods. Likewise, I don’t think it’s the end of the world… Read more »

Laura
Laura
5 years ago
Reply to  Beth

Maybe not a clear right or wrong, but your comment hints at a good guiding principle: does the debt allow you a good or reasonable chance of improving your assets? A student loan to get a degree in a field aligned with your interests and abilities AND where gainful employment is likely, is probably worth it; a student loan to study underwater basket weaving at a for-profit college is not. A loan with a reasonable interest rate to buy a car that allows you to take a better-paying job may be worth it; a loan for a Cadillac may not.… Read more »

Erik
Erik
5 years ago

Back in 2008/2009 as I prepared to return to graduate school, I was a bit naive about the amount of student debt that I was about to take out. I kept getting reminders from folks that this was good debt because it advanced my chosen career. Fortunately in 2012, I had an “aha” moment and became much better at personal finance. In those 3 years, I felt like I really put myself as well as my wife at risk. If school didn’t pan out, I’d be in so much student loan debt and it would have been difficult to get… Read more »

Rob
Rob
5 years ago

Does anyone advise paying off your mortgage (4.125% fixed) if you are able to?

Mike in NH
Mike in NH
5 years ago
Reply to  Rob

I think it’s a good question for the way this discussion should evolve, Rob. Taking on or paying off debt, like any other decision, should be thought through based onthe specifics of the situation and what makes the best financial sense. “All debt is bad. Pay off all debt. Don’t ever take on debt.” Based on that robotic advice, clearly you should pay off your mortgage if you can. But what if you can use that money to earn a better return than 4%? I think the discussion works better on cars because it is currently tough to “guarantee” a… Read more »

Rob
Rob
5 years ago
Reply to  Mike in NH

Yeah, it really is a tough call, one I go back and forth on. Being pretty risk-averse, I’m more prone to pay it off, but everyone and their mother is telling me it doesn’t make financial sense and that it’s better to invest since you can get a better return. We have no other debt except the mortgage, have a hefty e-fund, and money to play around with for investments (Vanguard). My thinking at this point is maybe to play the middle and split the difference–half of our liquid cash in investments, half towards the mortgage, rather than all or… Read more »

Divya
Divya
5 years ago
Reply to  Rob

Rob,

As long as you have a decent emergency fund, I would pay off the mortgage and start investing the extra every month from there on. This gives you a great feeling since you will be debt free and will be investing!

Divya

Dianecy
Dianecy
5 years ago
Reply to  Rob

Well, I have a paid-off house and I’m here to tell you that there’s not a week that goes by that DH and I don’t question our decision. There is going to come a day when mortgage rates rise and we kick ourselves for not having a cheap mortgage. IMHO, it’s far better to pay off SL’s and stock your retirement vehicles early than it is to pay off a low fixed-interest mortgage.

Beth
Beth
5 years ago
Reply to  Mike in NH

Good point about the car! A friend of mine recently financed her new car at .5% even though she could have paid cash — and could pay it off anytime. She makes me look at debt differently because she doesn’t care about the status of being “debt-free” — she wants the best return for her money. That’s a very different situation to be in than financing a car because she doesn’t have the money to pay for it. I think paying down the mortgage or investing is more about peace of mind than miath. Either way, a person/family’s net worth… Read more »

Jeff
Jeff
5 years ago
Reply to  Beth

Indeed, debt is a powerful tool if you use it wisely. Right now I only focus on paying down the student loans as they are at 6% and my income is reaching a point where I’m able to deduct less and less of the interest from my taxes. However my car and mortgage have such low rates that paying them off faster doesn’t save me much in the long run so it makes no sense to prioritize them right now and at this rate the car will be paid off first anyhow at just the minimum payments.

Mike in NH
Mike in NH
5 years ago
Reply to  Beth

Maybe it was just the way you wrote the comment, but referencing the “status” of being debt free intrigued me. I guess we as PFers can be just as guilty of doing something for status that might not be the best decision at the end of the day?

I’m sure the quest for being debt free has a more positive impact than the quest to own a Lexus like your neighbor…but still.

Chuckie G.
Chuckie G.
5 years ago
Reply to  Mike in NH

I struggle here too. Just last month I paid off a car note about 6 months early. It was a 5 year note financed at 0.9%. This was really just to cross the debt free line which I hadn’t experienced in some 16 years (when I was aged 17). While it made no sense from a financial standpoint (I think I “saved” a whole $5 in interest), I just wanted to do it. Felt good. Oddly enough it felt good in somewhat the same way that buying stuff I couldn’t afford felt good before I had my debt awakening. From… Read more »

Brad
Brad
5 years ago
Reply to  Rob

Can you imagine your life without a house payment? Does that make you happy and/or give you the freedom to do things you can’t do now? If so, pay it off.

Mathematically, you can make more money by paying the regular payment and investing the difference into a higher yielding investment. But for me, the sooner I no longer have to deal with my mortgage servicing company, the happier I will be.

Mike in NH
Mike in NH
5 years ago
Reply to  Brad

Cheers to that, Ocwen Financial is the bain of my existence…

Mysticaltyger
Mysticaltyger
5 years ago
Reply to  Mike in NH

Not the “bain”, the bane.

Sam
Sam
5 years ago
Reply to  Rob

We stopped paying extra on our mortgage when we refinanced from a 25 year mortgage to a 15 year mortgage (shaving 7 years off the term at the time of the REFI) and went from 4.75% to 2.75% interest rate.

Although I would still like to kill the mortgage and it would give us flexibility on insurance (an expensive bill in So. Fla.) at this point it simply doesn’t make financial sense to pay extra. That money should go towards retirement savings or college savings for our new baby.

Pete
Pete
5 years ago
Reply to  Rob

Paying off your mortgage at 4.25% is reasonable, but you have options. If you were able to earn 7% on an investment of the same size as your current mortgage balance, are you comfortable taking the risk in that investment to make a little more money? Pay your mortgage and you KNOW you saved 4.25%. Invest your money elsewhere and you MIGHT make more. There aren’t a lot of options to make 7% today except in peer to peer lending – but that’s what I’m doing. Interest rates are a financially good deal right now. For those with a little… Read more »

Jo-Pete
Jo-Pete
5 years ago
Reply to  Pete

This hits the decision square on the head. People discuss how they could possibly make more money by investing in the stock market with a return of X%, which makes it a “better” decision when you look strictly at that math. However, the real comparison is what kind of guaranteed return you can get elsewhere. If I could have gotten 5% guaranteed return at a bank, I definitely would not have paid off my mortgage. Because I couldn’t find anywhere that would offer me a guaranteed rate higher than my mortgage rate at the time, it was the best investment… Read more »

getagrip
getagrip
5 years ago

I think it really comes down to debt to improve your life versus debt to fuel your life. If you plan right, have a clear goal, and can afford it, debt can be used to obtain propery, education, and through those gain an opportunity to get ahead. It’s the whole point of leverage. However, using debt to vacation, buy a fancy car (not just a reliable one), overbuy on housing, are about fueling a life you can’t afford today and hoping you make enough tomorrow to pay it all off. You aren’t really making opportunities or focusing on the future,… Read more »

lmoot
lmoot
5 years ago

If it weren’t for the option of going into debt, I would have to have relied on someone with a larger income than me to accomplish the things I have so far. Needless to say “debt slave” sounds better to me than “gold digger”. I wouldn’t quite call myself a slave though. To say so implies that I have minimal control, but so far I have been the master of my debts. The only interest I’ve ever paid: 1) 9 month car loan (paid) 2) 3 month emergency overseas cash advance (paid) 3) Mortgage (6 years…about 57k left) And I… Read more »

Sam
Sam
5 years ago

I think debt can be smart, a mortgage can make better sense than paying rent (not always), student loan debt (within reason) can help you obtain a better career and higher earnings. Over the years, we have gone through some very anti-debt periods, but more recently we’ve become a little bit more flexible. We have $20,000 in our emergency fund, but $5000 in credit card debt and $7500 in car loan debt. It drives me crazy to have car and credit card debt, but both are at 0% so it doesn’t make sense to take cash out of our interest… Read more »

Jerome
Jerome
5 years ago

My first and last debt I ever had was for buying a car and marrying after college. The car was small and the wedding was not over-expensive so it felt ok when I took on the debt. Two years later that debt almost scuppered my chances on a very good job in another country. You see, when you emigrate you have to pay off all your debts. In the end I could convince the bank to be a bit more flexible and I got the job. My own lesson was that I don’t know whether debts are good or bad… Read more »

Sanjeev Shrestha
Sanjeev Shrestha
5 years ago

A good article. Debt, I believe, is a slavery. Debt to anyone, including family members, friends, credit companies, I believe should be avoided as much as possible. I have seen my family members fighting and relationship ended because of money issues. I have seen my friends calling credit consolidation companies because of credit card debt. For me, I never liked debt. People say good debt and bad debt. I say minimize and eliminate any debt as much as possible. Fortunately, the more older I get I more I believe that Debt is slavery. It should be the first to be… Read more »

Alea
Alea
5 years ago

Totally agree, I see debt as being shackled to a wall. If you have debt there is no moving forward you are constantly running behind and at the mercy of life, because when things go wrong, they can really go wrong.

Other than a mortgage or starting a business, I see no reason for personal debt.

phoenix1920
phoenix1920
5 years ago

It seems a lack of money, in general, as opposed to debt itself, is slavery. For those who were not born with an inheritance to use, once we fly under our own wings and no longer rely on our parents, we are forced to work so that we can earn the money necessary to live. It does not seem to matter whether we write our check to our landlord and never see any ROI or whether we write our check to a mortgage holder and eventually own the asset, we are still bound by the shackles of needing a place… Read more »

Cindy G
Cindy G
5 years ago

Great article! I think you are correct, we sell ourselves on taking more debt without the full risk analysis of what would happen if we lost our job or income and couldn’t pay. It’s so easy to spend spend spend and like overeating it’s hard to shed the debt without changing our behavoir aND thought processes. BTW Albert Einstein probably never said the interest quote you attribute to him.

Linda Vergon
5 years ago
Reply to  Cindy G

Hi Cindy G –

Thank you for mentioning the error in attributing the quote to Einstein. This was my insertion in the editing process, so please “attribute” that error to me!

Best,
Linda Vergon, Editor

Mike in NH
Mike in NH
5 years ago
Reply to  Linda Vergon

“The problem with quotes on the Internet is you can’t always be sure of their authenticity.”

-Abraham Lincoln 🙂

E.D.
E.D.
5 years ago

I think that mortgage debt on a modest home where you have a good chance to stay for five years or more is reasonable. As are student loans as long as the student’s profession can reasonably pay it off.

DH and I are two years from being totally debt free. The interest rate is 3.3%, but the freedom of having no debt is definitely worth it. We are in the phase of trying to figure out how we’ll invest the large chunk that we are currently throwing at the mortgage every month.

Donald Stanat
Donald Stanat
5 years ago

What dark force makes us attribute quotes to Einstein? Apparently the author believes we will take the aphorism more seriously if that brilliant man said it, but its proper effect in this case should be for the reader to realize that the author is sloppy. A pithy observation does not need an attribution; this one is a blemish on an otherwise good article.

Linda Vergon
5 years ago
Reply to  Donald Stanat

Hi Donald,

Regarding the attribution to Albert Einstein, that was an insertion I made in editing. Glad you liked the rest of the article, though.

Best,
Linda Vergon, Editor

dgalvan123
dgalvan123
5 years ago

One interesting type of debt I’m about to take on: a loan to purchase Solar Panels. My monthly electrical bill from our utility (averaged over a year) is $178. I’m in the process of getting a loan for a set of solar panels that should provide just about 100% of our electricity. That will result in $500 down, and then fixed monthly payments of $138 for 20 years. Add the ~$20 per month I’ll still have to pay our utility just to be connected to the grid, and I’m up to spending $158 per month total, saving $20 per month,… Read more »

Fervent Finance
Fervent Finance
5 years ago

I have become more debt averse as I make my journey to FI. The only debt I currently have is student loans. The two laons I have left are both at 3% so I’m in no rush to pay them off. So in a sense I guess I’m averse to high interest rate debt. Low interest rate debt can be a good way to pad your retirement and other investments which in return you would hope/assume yielded greater than 3% in my case.

Ely
Ely
5 years ago

I think debt can be useful, but you have to be careful not to let it take over. I use my credit card for everything, but pay it off every month – I haven’t carried a balance in about a decade. I have a mortgage and a student loan, both at very low interest rates. The student loan is so cheap it makes little sense to pay it off early when I’d rather be beefing up my emergency fund and retirement accounts. The house I can see staying in forever, or at least for a long time – going on… Read more »

Beth
Beth
5 years ago

Debt scares the crap out of me. That being said, I have about $7k left on my car, $100 on a credit card and $110k on my mortgage. I dream of the day I am debt free.

Jonathan
Jonathan
5 years ago

Ever since I was educated on this subject (around the time I graduated college), I’ve firmly believed in the value of using debt as an investment tool. My wife and I have been fortunate that our income has always exceeded the expense of our modest lifestyle, and we’ve been trained to always put our money to work for us. We’ve taken on mortgage debt for rental properties, cash-out-refinanced those properties, kept my student loan debt for its full term, and last year financed a car that we could have easily paid for in cash. All of this debt was incurred… Read more »

Carla
Carla
5 years ago

Debt is scary, but there were times when I didn’t have a choice (medical). At one time I was quite smug in that I would never get into uncontrollable debt after all of the debt from my ex-husband was paid off. Life taught me to never say never.

CIWOOD
CIWOOD
5 years ago

Never borrow to purchase a depreciating asset. Think cars!

Your debt payments should never outlast your purchase. Think lunch!

Use debt to purchase an asset that will appreciate. Think real estate!

Use debt to increase your income. Think skills!

Debt can be good for an economy but bad for an individual. Economics class vs financial planning class!

No debt – no master!

Laura
Laura
5 years ago
Reply to  CIWOOD

This sums it up nicely!

Glorified Plumber
Glorified Plumber
5 years ago

Neat read! Not sure what much of the government debt discussion has to do with anything, but I liked the talk of pitfalls and impacts to ones life that debt can bring into the future. I tend to agree with him that folks in general lack a general ability to accurately measure the risk that any given debt brings to them. Hell, I have an engineering degree and wrapping ones head around 100k+ numbers and the impacts NOW can be a mathematical masterpiece. I’m not sure if the “debt understanding” delta is solvable simply by better education. I feel that… Read more »

Mysticaltyger
Mysticaltyger
5 years ago

I have also come to the conclusion that much of what plagues people’s personal finance problems isn’t solvable with education–at least not education alone. There need to be stricter limits on the amount of debts people are allowed to take on. There should also be universal 401ks with mandatory or quasi-mandatory contributions (i.e. automatic enrollment with an option to opt out). Most people just won’t do the right thing in the long run for themselves. We see it over and over and over again.

Glorified Plumber
Glorified Plumber
5 years ago
Reply to  Mysticaltyger

Was JUST reading an article on that actually (old article, but had come up somewhere) regarding Australia’s “Retirement Savings System” which boasts 90% worker participation, entirely due to forced participation. http://www.bloomberg.com/bw/articles/2013-05-30/in-australia-retirement-saving-done-right I feel like something similar has SOME ability to be executed in the USA… people are used to (at least a portion of their paychecks) into mandated social security tax. While obviously, SS is a different animal… the concept of “forced participation” of some percentage of an income is not foreign to Americans in common income tax brackets. Anyways, forced 401k enrollment (if the plan is offered) at like… Read more »

Erik
Erik
5 years ago
Reply to  Mysticaltyger

I think the state of Illinois will require small businesses with 25 or more employees to automatically enroll them into an IRA as a forced savings plan. So it’s happening…and I believe that’s the good thing.

Nate
Nate
5 years ago

There is a big difference between leverage and debt. As an example – it is hard to save one million dollars and then live of the passive income ($40,000 at 4% withdrawals). It is much easier to save $100,000 and leverage it to one million in rental property, then live off the passive rental income (between $30,000 and $40,000 depending on many factors). You may ask, “but isn’t it risky to owe so much to the bank?” Not how I see it. I know my maximum loss is the $100,000 I have in down payments. The bank is the one… Read more »

KW
KW
5 years ago

A few people have touched on this a bit, but it’s very different to take on debt to make money on an asset that appreciates or provides income, and another just to take on debt. We are business owners. We have just a mortgage for personal debt (and are paying it off at an accelerated rate), but we have business debt. Typically, we are buying equipment. Once that equipment is installed on our floor, it makes money every hour it runs. It pays for itself (though there is always risk involved). On a personal basis, the obvious parallel would be… Read more »

Don
Don
5 years ago

“On the contrary, during the great financial crisis of 2008, the Federal Reserve Board and the government kept justifying all those bailouts by saying people aren’t borrowing enough. From that, one would surmise that debt has to have some redeeming qualities.” The Fed was most interested in seeing businesses borrow more. The money supply in the country is determined by the amount of borrowing in the bank system (look up fractional reserve banking). When businesses cut back on loans, the money supply is contracted and it could also mean a business is not expanding. On the other hand, when a… Read more »

HJ
HJ
5 years ago

My position is to be debt-free as soon as possible including your home. Pay off your mortgage before you retire, so you have a roof over your head and only utilities, insurance and maintenance to pay from your retirement income. Pay off credit cards in full every month throughout life. It helps keep harmony in the family and greatly reduces stress. When you work for someone else, always have an emergency fund to tide you over should that not work out. I love being retired and in a very comfortable place financially. It takes work, but with early planning and… Read more »

LennStar
LennStar
5 years ago

The whole dept and crisis thing is very easy: There is no dept without savings and no savings without dept. Person As savings are person Bs dept. Thats why we hear that people dont borrow enough money. There is so much money sloshing around that nobody wants that the price of money dropped into the cellar. For the average person there is practically no reason to go into dept and pay for it in interest. The only exception is buying a house, because it may be you pay the same as if you were renting it, but in the end… Read more »

Rex
Rex
5 years ago

Great article, great comments. I think that borrowing to get an asset that will increase in value & increase your net worth is a good idea. Borrowing for a depreciating item like a car can be a good idea if interest rates are low and you can pay it off quickly. “Bad” debt – like credit card debt is not bad if you can pay most of the balance every month, and are disciplined enough. BUT remember the banks have it stacked in their favour, and rely on human greed, ignorance, and lack of a financial plan. I think we… Read more »

Nick @ Millionaires Giving Money
Nick @ Millionaires Giving Money
5 years ago

I think it all boils down to affordability and what kind of debt you take on. Personally I only take out debt when I want to buy an asset and that asset has to pay an income which exceeds the interest I pay on the loan, this way I use debt to make money. Great post, thanks for sharing.

Tyler Philbrook
Tyler Philbrook
5 years ago

My position on debt has never changed, I’ve simply not lived what I believe. I constantly thought I would pay off the card before the interest would hit but time and time again kept happening until it sickened me to look at how much had been charged. That did not however stop me from charging more, as one person put it I used the “plastic anesthesia” to make it through. I’m not happy to say I’ve taken a more realistic view and am now working on getting it down. This is a great article for those considering using debt.

Golfing Girl
Golfing Girl
5 years ago

In poor economies (like this one we are in) people tend to go back to school because they can’t find work and a student loan is the easiest way to get cash. Our government has made it really easy to get overloaded in student loan debt by making it a go to if you can’t get a job. So too many people that shouldn’t be going back to school are simply piling up debt because it is one of their few options. I feel bad for them. But this increasing demand in enrollment for people who would like to be… Read more »

Sara
Sara
5 years ago

The older (and presumably wiser) I get, the more comfortable I am with debt. I’ve always been financially responsible, and very good with personal finance. Like many people I have a car loan and a mortgage. I charge most things on credit cards that I pay off each month to get the cash back rewards. I paid off my student loans (and they started at 9.125%, not the cheap rates they have now). I have lost jobs, gotten new jobs, paid loans off early, and gotten more loans. I’ve refinanced the house a couple of times. I’ve recently gotten divorced… Read more »

Seeking guidence and grateful
Seeking guidence and grateful
5 years ago

Hello everyone, I’m seeking some advice for my particular situation. If anyone could provide some suggestions I would greatly appreciate it. I am 29, single living with a good family friend roommate in Southern California. I have a relatively stable job making $84,000 with one month of paid vacation and PPO 80/50/50 ish health and dental insurance plan paid for. I have about $50,000 in debt. About half of that is a car loan debt. The rest is student loans and credit cards. In three months I will be moving within walking distance to work and selling the car and… Read more »

Bethany
Bethany
5 years ago

I’m sorry – but all I got out of that was you gave away your pet.

Dianecy
Dianecy
5 years ago

In addition to this site, I’d hang out at Mr. Money Mustache (MMM) and Early Retirement Extreme (ERE). Even if you do not plan to retire, you will learn how to kill your debt and answer your own questions, which is mighty empowering. I’m also a big fan of the MMM Forum, where you could simply cut and paste your comment for immediate assistance.

Kelli B
Kelli B
5 years ago

Great article! When you first read the statistics, it is shocking that student debt is the 2nd highest; however, when you dig deeper (think about it more), not so much. College tuition is very expensive AND times have changed. Think about it, one-two generations ago, college was very optional. Few people went. Now everyone has to go (or at least thinks they have to go).

Unfortunately, many students don’t really understand how much they’re biting off. They don’t understand what that monthly payment is going to look like… after all, that’s forever away.

savenospend
savenospend
5 years ago

If people weren’t supporting student debt, they could take on auto and home loans. Ironic that in the past businesses would complain about monopolies if one company had all the customers. Well, guess what? Student loan companies are sucking the possibility of utilizing debt as a tool for those who are growing assets. As a banker I saw HUNDREDS of young adults with a debt load that precluded good rates AND (even w/a zero balance) good points/perks/other shizzle on a credit card. So guess what? Banks are happy to sell them HIGH interest lines of credit or high interest CCs.… Read more »

Milan
Milan
5 years ago

As someone recovering from having a lot of consumer debt and finishing off the last 15K of my student loan debt this year, there is no place for it in my lifestyle. It wasn’t helpful for me and the school debt didn’t guarantee me a job that I could “easily” pay it all back and it’s not like I majored in underwater basket weaving. Cash is king is the better ethos for my lifestyle and financial health. My ultimate desire is not to need credit because I will always have the money. Rather it’s instantly or accrued over a set… Read more »

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