Is Most Debt Bad?

When you think of debt, do you get warm and fuzzy thoughts? Didn’t think so. Do you think of debt as something that you’d like avoid or work toward eliminating? This latter viewpoint seems to be the prerogative of many folks in the personal finance blogosphere, at least based on what I’ve read in numerous articles over the last several years.

A recent short article on Moneyland caught my attention, as it discussed the notion that more young people are leery of debt these days. Instead of viewing debt with the same mindset that their parents did, many are making decisions that reflect a greater reluctance to take on debt than prior generations. For example, making decisions such as living at home with parents or renting instead of going out and buying a place.

My take on this: Bravo!

Now, it’s probably true that instead of absolute fear of debt, it’s better to look at it objectively and realistically. It can be really bad, but at times debt can be a tool for getting certain things done – as well as an emergency safety net, dealing with totally unforeseen medical expenses, etc. Also, if there was no money to borrow, the business world would come to a standstill. So admittedly, debt does have an important role in the big picture.

That being said, however, for the average person out there, most debt is simply not worth taking on. There is something to be said for aspiring to debt-free living.

Here are some different thoughts on types of debt and their legitimacy:

Bad Debt

What do many people borrow to buy? Often times, it’s for consumer goods purchases. Buying clothes, electronics, furnuiture, etc. With such purchases, if we can’t afford to pay it off in full as soon as the credit card bill is due, it shouldn’t be bought.  Carrying balances means that you shouldn’t have bought the thing in the first place.

What about cars? Are these worth taking out loans for? Well, probably not in my view. If somebody is solvent enough to have a decent emergency fund, then why not pay in full for a car? It doesn’t have to be a $25,000 new car if that’s not affordable. Why not get a functional $5,000 used car instead, if that’s what you can afford to buy in full.

I remember a guy I worked with over a decade ago who bought a brand new SUV despite being a few years out of college.  He said he needed to buy it because he needed to feel like he “arrived”.  Smart guy, otherwise.  I’ve kept in touch with him, and he’s totally got his head on straight now. But back then, he made a decision that showed too much comfort with debt.

Borderline Debt

It’s safe to say that most home buyers, particularly first time buyers anyway, take on a mortgage. It’s just the way things are done. However, no matter what anybody says about tax deductions, the pride of home ownership, or things of the like - a mortgage is still debt. If you live in a dream home and finance it with a large mortgage, you will be working many hours and possibly years to pay for it. Sometimes it can be helpful to think about how time is money, and determine exactly how much we have to work to finance such dreams.

It seems to make sense that one should ideally buy something that fits legitimate needs in terms of space, location, schools, etc. Some debt is realistic in this case, but should be manageable with the goal of paying it off sooner than later. Trading up for a McMansion, luxury condo, etc – not sure about that if it requires extra financing versus what’s truly needed.

“Investment” Debt – To a Point, Anyway

Now, not all debt is bad of course. When people start questioning if college is worth it, I think that’s going way, way too far. It’s worth it, necessary, and needs to happen for most younger folks if possible. Such debt should still be minimized though, and choices can be strategically made to pick the right college based on quality and value. Then, this debt can be considered to be an investment in one’s future.

My thought is that burdening somebody with tons of debt to start out life is not ideal. But, since college is absolutely necessary for most people, why not view the choice of which college to attend as a strategic investment? You know, one that requires an analysis of costs and expected/potential returns.  Perhaps it’s a matter of financial literacy, reframing the college decision, or thinking more pragmatically than emotionally.

My Questions For You:

Do you see as I do, that most debt is truly bad and unnecessary, other than a few of the specific examples I noted above (medical, limited home, smart college choice)?

Do you think that this recent aversion of debt by young adults is a good thing for our society as a whole? Or, is it irrational and has it gone too far?

 

Comments

  1. says

    I know debt is evil and all that, but when I went to go buy a car, I took out a car loan. It may have been dumb to most people, but I drive a lot and didn’t have the savings to pay for a decent car upfront. I needed something very reliable and that meant low mileage. I financed actually quite a bit, but the terms of my loan are good, so I’m not too worried about it.

  2. says

    I think aversion to consumer debt is healthy. Credit cards and car loans, included.

    I also think that people should be very careful in taking out student loans or selecting a college. People go to expensive schools to get a degree in something less lucrative like English or History. And they take out loans to pay for it all…

    • Squirrelers says

      Dollar D – oh, I agree with the notion of being careful where to go to school. While some expensive private universities have international brand names that can be more than worth it, other schools that are expensive aren’t worth the premium in terms of ROI. Plus, as you say, some majors can lead to more money than others.

  3. says

    Um, is the notion of actually saving up for something before you buy it such a bad thing?

    Yes, I absolutely think it’s a trend in the right direction for everyone but the banking industry.

  4. says

    When I think of debt, I think of loss of freedom and flexibility. If I borrow money, I may be obliged in the future spending time doing something I’d rather not do to pay off the debt. And I guard my time very jealously. For me, it’s the most precious commodity.

    • Squirrelers says

      Kurt – exactly, loss of freedom and loss of flexibility. And yes, time is precious – we can’t make more of it! Totally agree.

  5. says

    I don’t see debt as good and bad. Some debt is better than others though. I prefer to only take on debt that allows the asset to grow. It used to be housing fit that definition. I think it will again in the next few years. I try to stay away from other debt, but sometimes you need to use it. I prefer the lowest rates and terms possible.

    • Squirrelers says

      krantcents – sometimes you do need to borrow, I agree. Though hopefully not that often, and hopefully the need ends at some point.

  6. says

    I think that most debt is potentially dangerous. No matter what the debt is for, there is still an obligation that has to be repaid from future earnings. You are in effect selling your future time.

    • Squirrelers says

      cashflowmantra – great way to put that, I really like this: you are in effect selling your future time. You’re right, and I think this is a powerful way to put it.

  7. says

    I agree with most of yours. However, if a person can afford the payments, a new car with excellent gas mileage and low cost of ownership is a better buy, in my humble opinion, than a cheaper used car that may have a much higher cost of ownership. I do agree that people should not necessarily buy a house or at least buy one they can afford. They should wait until they are secure in their income for that.

    I was always amazed how people would go into debt for furniture, clothes, vacations, electronics. I’d never dream of doing that. But then I was amazed that so many people took out home equity loans just to fix up their house with the latest style of renovations.

    • Squirrelers says

      Maggie – the notion of taking out home equity loans to renovate for stylistic purposes is mind-boggling. Talk about confusing wants and needs!

  8. says

    After the economic calamity we just went through, it’s not surprising that young people are more fearful of debt than before. It also explains their fear of investing too. Many of them just watched parents and other family members lose jobs, lose money in the markets and overextend themselves in housing and other debt. The pendulum tends to swing in the extreme opposite direction before it finally settles in the middle. The question is how long fear will last before that happens.

    • Squirrelers says

      JP – you have good points. Given that people witnessed those of older generations facing trouble, I wonder what would happen after a generation goes by and we have prosperity through that time? Human nature what it is, people tend to have short memories or they don’t absorb lessons they haven’t directly seen.

  9. says

    Thanks for bringing this subject of generational shift in debt perspectives. Two things I feel I must add. Firstly, many times debt is a result of emergencies and people do not necessarily have the ability to pay outright. Secondly, debt should be rated according to its terms. Many companies create unrealistic and untenable terms to debt. How fees and interest are subjected should also come into play when judging whether debt is good or bad?

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