For those with us so far, you understand debt will unapologetically bury you beneath the floorboards.
Now it’s time to go deeper: there is ‘Good Debt’ and there is ‘Bad Debt’.
But let’s not dance around it, most of us don’t know the difference. Make no doubt about it, you’ll be punished for your ignorance.
Just about all credit card debt is what is usually called ‘Consumer Debt’. There’s a longer explanation, but basically this means you got into debt because you bought something that will either disappear, or wear out and break after you buy it.
That right there? Bad Debt.
This isn’t just frivolous spending either. You need to buy food, you need clothes, and you need gas money. Bad debt means that you borrowed money for something that will drop in value, and then you’ve got to pay back more that what you borrowed. Just about every person that walks into a payday loan company is doing this.
It’s a Devil’s bargain. More than a few people have found themselves in a downwards death spiral because they didn’t set things up right from the start. Remember this: When you’re using your credit card, you’re taking a high interest loan. But also remember you can dodge the interest if you pay up in full, on time.
If you take your credit card to the store for $100 in groceries, get home and transfer $100 from your savings account over to the card, you broke even. No harm, no fowl. If you buy that Campbell’s Soup today, pay the minimum balance, and pay off the rest when you get paid next month? You got taken.
Good Debt means borrowing money for something that gets more valuable over time.
Bad debt is easy to spot. Good debt is a little more tricky to spot.
Ask yourself this: “When I pay off the debt, do I win in the end?”
If you borrowed some money and bought a brick of gold twenty years ago and still had it now… well let’s just say your late night howling at the moon would be keeping your neighbors up.
Same thing if you bought Apple Stock before the iPhone. What you’re looking for is examples of things that become more valuable overtime. Real Estate is a classic example.
If you borrowed money to buy a house in NYC and lived in it for 30yrs, you win. That house is most definitely worth more than when you bought it. If you sold it in a rush and moved after five years, after all the fees, chances are you lost big.
If you bought that house and rented it out for 30yrs, you won big. The house is paid, worth more than what you bought it for, and puts money in your pocket every month.
This is how most businesses work. Someone borrows money, builds up their business, then pays off the loan. They win in the end. Debt can be dangerous, but sometimes dangerous things can be powerful tools.
Good debt can take other forms. It’s becoming more and more popular to shit on student loans. The math doesn’t lie. If you’re making $20,000 a year and you have the brains to be an Accountant, a Lawyer, an Engineer or a Doctor, borrowing that money now means you can 2x, 5x, 10x, 100x your salary down the road.
People like to argue about it, but really there’s no such thing as bad education. Knowledge is power and continues to be so. Just remember that before you start chasing that Masters Degree in French Literature, you’ve got to have a way back out of that debt. Some schooling gives you marketable, in demand skills. Other paths give you knowledge that’s harder to trade for a salary.
Do your due diligence. Remember, to win in the end you need a way out of the debt. If non-career specific education is the right path for you, bust your ass looking for scholarships, get flexible jobs, use family support, and rely on student loans last not first. Decades of stressful, crippling debt make it tough to enjoy studying something for the love of it.
Debt is like flame. It is inherently destructive, but if you treat it with respect, it can be a tool used to do great things.