Is There Such a Thing as “Good” Debt?

To repeat a line I have used with my children on occasion: “The short answer is no; the long answer is nooooooooooo!” 

We would all be better off without any debt.  However, that doesn’t mean that all types of debt are equally bad.  Some types of debt are definitely worse than others.  Since virtually all of us will have to use debt at some time in our lives we need a way to judge between types of debt that should be avoided completely and debt that we might prudently consider under certain circumstances.  So how do you differentiate between the two?

The leaders of the Church of Jesus Christ of Latter Day Saints, of which I belong, counsel members to avoid debt “with the exception of buying a modest home or paying for education…”  That is a very conservative standard but most of us would benefit from following it.    

Jim Stovall and Tim Maurer, in their book The Ultimate Financial Plan, offer a rule to identify debt that should be shunned.  Their standard is that we should avoid all debt “on…depreciating asset[s] – assets that lose value over time.  This is furniture, computers, stereo equipment, clothes, jewelry, boats, motorcycles, and yes – this includes automobiles.” 

This is a great rule of thumb and something we should consider before going into debt.  A modest home and an education, the two exceptions mentioned previously, both have a good chance of gaining in value over time, which is why these are areas where at least some debt might be acceptable.

Daniel R. Solin, in his book The Smartest Money Book You’ll Ever Read, reminds us that “every time you borrow money you erode your future income.”  This is a sobering thought and leads to the conclusion that you should not go into debt unless the benefits you will receive in the future are worth more than the future income you will sacrifice.  Ultimately that is the analysis that should be made prior to taking on debt of any kind.           

In the next several posts we will look at specific types of debt – credit cards, auto loans, home mortgages, student loans, etc. – and provide some guidance and advice on how to apply these rules and resist the temptation to enter into ever increasing amounts of debt.