2 Questions to Determine If Your Debt Is “Good” or “Bad”

by Jessica Sommerfield · 9 comments

Debt is a bad word in financial circles: People are constantly talking about eliminating it, tackling it, consolidating it, and avoiding it. While I can’t argue the wisdom of these aggressive (or evasive) actions toward debt, there are times when debt isn’t a bad thing.

Personally, I’ve been debt-free a few times in the past, and I plan to be again. I am in debt right now, but I don’t feel bad about it. I used to view debt of any kind as taboo and unacceptable, but I’ve realized that sometimes loans are a tool that can be used to benefit your finances and position in life. From what I can see, my debt follows a healthy pattern — and as long as it can pass the following questions, I have no reason to regret it.

Two Questions to Help You Assess Your Debt

1. Is it temporary, or is it a lifestyle?

What’s your game plan? Being in debt at various times in your life is nearly unavoidable unless you have vast resources. If you’re like most of us, you can’t afford to pay cash for a dependable vehicle, a roof over your head, or a college education.

It’s wise to save in advance and pay up front as much as you can, but there will still be a certain amount you can’t afford without some help. A good question to ask yourself when you’re considering debt is whether it will be temporary or not.

Every debt you own should have a timeline. Mortgages have a timeline; car loans have a timeline; even student loans have a timeline once you’re out of school. You should either have a lender- or self-imposed plan for how and when you’re going to pay back each debt.

2. Is it worth it?

WHY do you need to go into debt? Even debt categories that pass the first question might not pass this one. For instance, financing a vehicle may be a necessary and unavoidable form of debt in an average household, but do you need two vehicle loans? Even if you need two vehicles, presumably doubling your debt and monthly financial obligation isn’t a good idea. Why not try to pay off one vehicle before financing another, or buy your second vehicle used with cash?

This might hit a few nerves, but our society is addicted to purchasing new vehicles every two to three years, whether they need them or not. Instead of getting their money’s worth out of a good vehicle, many families move from car loan to car loan without realizing they’re establishing a bad debt pattern.

As I said, not all kinds or debt are bad. There are times when going into debt means investing in your personal future — whether starting a small business or purchasing your own home. If you can answer “yes” to this question without any hesitation, then it’s probably a good debt to have.

Is Your Debt Good or Bad?

Look at your own debt patterns. Do you have the habit of going into debt as a crutch, and as a way to project your lifestyle beyond the reach of your income? Or do your debts represent responsible, thoughtful decisions to invest in your present and future financial success? Can you feel at ease about your debt, confident in your financial stability, credit rating, and game plans for payoff — or are you embarrassed to admit what (and for what) you owe?

Let us know your answers in the comments!

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{ 9 comments… read them below or add one }

Chelsea_Gerrard August 9, 2014 at 1:28 am

Can we actually avoid debt? Isn’t that a silly question :) I think there has to be a perfect balance between your income, expenditure and saving. Neither underestimate nor overestimate any of them! Do you think it can be a lifestyle for the long run?

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David Ning August 10, 2014 at 8:44 pm

Finding the right balance can absolutely be a lifestyle. And the good news is that once you start practicing it, then your lifestyle will be pretty sweet because the extra savings will soon allow you to afford the finer things in life.

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James Salmons August 11, 2014 at 12:36 pm

Much of what is required when it comes to the necessity of debt depends on attitude more than necessity. Personally, I found some debt justifiable even after I knew quite a bit about money, particularly real estate which I used to under-gird and enable my primary business.

However, my parents were dead against debt and never had a dime of debt on anything even though they bought cars (including new ones), homes and even a business. Most people might think that impossible, but when you have no debt and live modestly it is amazing what you can do.

With a good plan and commitment there are many ways to achieve success. The really important idea is to know what you are doing, know how to count, and staying in control.

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David Ning August 12, 2014 at 2:13 pm

Debt can definitely be a good tool to build wealth, but like you said, you can live an amazing life without it.

I bet it would be really interesting to hear how you built your real estate business!

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Syed August 11, 2014 at 1:21 pm

There certainly are situations where going to some amount of temporary debt is a good idea. It’s all about risk vs reward. if the interest rate is low or manageable enough and the eventual payout will help your finances, that could be considered good debt. Even though my student loan balances are high, it allowed me to get a job which will presumably provide me with a high stable income for the rest of my working years.

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David Ning August 12, 2014 at 2:16 pm

Good example Syed. Student loans enable many people to get a good education and compete on even ground, which is not always possible when you grow up with financial difficulties.

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Jon @ Penny Thots August 11, 2014 at 2:11 pm

I look at debt as good as long as you can afford it and it makes sense for you. By that I mean, if you are looking for a new car and can get a 1% interest rate by financing it and you plan in keeping your money invested to earn a higher interest rate, then it makes sense. But if you are going into debt that you can’t afford – like $100K student loans for a college degree whose job will only pay you $40K a year, that would be bad debt.

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David Ning August 12, 2014 at 2:17 pm

That’s a good way to look at it Jon. People tend to get into trouble when all they think about is the monthly payment, because any little hiccup will make everything unaffordable.

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Georgi August 15, 2014 at 1:55 pm

I am always check when I make a debt it will be a good one. As Robert Kiyosaki – “You have to make difference between good debt and bad debt”. By the way he says that you debt for your own house is a bad debt because you do not generate income from it.

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