There is No Such Thing as “Good” Debt

Many years ago, debt was hard to get and was considered a dangerous and risky thing to have. Now it is so easy to come by, that possessing debt is almost universal. In fact, in 2008 the easy access to debt got our country into a bit of trouble, causing the housing crash. Today, if we want something that we don’t have the money for, (also known as something we can’t afford) we just borrow the money and buy it anyway. It doesn’t matter that we can’t afford it. All that matters is that we can afford the payments.

Once debt became universal, Americans wanted to remove the stigma of accumulating debt. We didn’t want to feel guilty about buying a car we couldn’t afford. So along came the concept of “good” debt and “bad” debt.

But all debt works against our wellbeing. If we use debt to purchase things, we need to earn extra money this year to pay for the things we bought last year that we couldn’t afford. Debt from last year takes away from what we can afford this year. The principal and interest of each debt that was acquired in the past must be paid out of our current earnings. If we can’t make the payments, someone will come along and take back the things we bought on credit. Bankruptcy is a byproduct of debt. Divorce is a byproduct of debt. Suicide is a byproduct of debt. Debt is not our friend. There is no such thing as “good” debt.

I hear almost daily about how a deductible home mortgage of 3% is a “good” debt, and the bank charging 18% on my credit card balance is a “bad” debt. Just because the interest rate is low, or deductible, doesn’t make it good, it simply makes it cost less. It becomes less bad. Less bad is not the same as good. 

If something is good, then we should want more of it. Having money in the bank is good. So having more money in the bank is even better. If having a $300,000 mortgage at 3% is good, then we should want better, which would be an $800,000, 3% mortgage. But no one thinks having more debt is better. Better is having less debt. That is because debt is bad and the better position is to have less of it.

Which of these would be considered better: Winning a $1,000,000 house with a 30 year, 3%, $300,000 mortgage, or winning a $700,000 house that has no mortgage at all? I suspect everyone will take the free and clear house, even though the other option has “good” debt. That is because debt is never “good,” it is always a burden.

Sometimes we do choose to take on a burden because it will provide something else we want that is of greater value than the debt burden. Taking on a reasonable mortgage burden in order to own a house is one of those situations. If home debt is approached with the notion that the debt is “good” then there is no incentive to ever pay it off. We just keep that “good” debt around forever. But if we can see it as a burden, then we have an incentive to get rid of the burden. 

When we move the debt from “good” to its more correct classification, a burden, we become motivated to rid ourselves of the burden. We begin to accelerate the debt payments. Once the debt is off our backs, we will be able to use the money we earn for current and future purchases. We are no longer paying for our past purchases and the accruing interest. Since we are now better off without the debt, the debt was not actually “good” as we had originally convinced ourselves.

Another place we might consider taking on this burden is buying a rental property. In this case, the debt allows us to put an item in our investment portfolio that will begin to grow and put money in our pockets. But too often, because the interest is deductible and the purchase is an asset, we mistakenly feel this mortgage is “good” debt. 

Many real estate investors think they should never pay off their rental mortgage because it is “good” debt. It is as if they think they need the interest deduction. But in actuality, the interest costs a lot more than the deduction saves. They will be better off without the burden of the debt. So why don’t investors pay off their mortgages quickly if they are better off without them? It’s because they believe their debt is “good” debt, so they don’t make any effort to rid themselves of it. 

I used debt to purchase my real estate investment properties. But, since I know this is not “good” debt, and is a burden, I have been working to pay it off sooner rather than later. Soon I will own all the properties free and clear.

I fell prey to the “good” debt mentality when I was paying off my student loans. When I got down to the last loan, which was only 3% interest, at a time when the prime rate was 8%. I mistakenly thought it was “good” debt so I shouldn’t pay it off. When I finally came to my senses and just wrote the final check, I felt a great weight lift off my shoulders. It was a small enough loan to just write a check and be done with it, yet I resisted and carried this burden for quite a while longer than necessary.

Today, I tend to only borrow money if I am buying something that will put money into my pocket, such as a rental property with positive cash flow. That means I’m using the burden of debt to improve my financial position. The debt is making me money. Then I get busy paying off the debt ahead of schedule to relieve the burden. Just because it allows me to make money, doesn’t mean it is “good.” It still has the potential to get me into trouble.

We are about to build a new house that we will downsize into now that our kids are grown. Our current house hasn’t had a mortgage since 2001. We will likely use some debt in the process, as the sale of our old house may not occur in time for us to purchase the new one when it is completed. We will likely have an interim loan until the old house sells. Then we will be back to a free and clear house. We feel the short term burden is worth the reward of trading to a smaller house.

A poor use of this debt burden would be buying a boat. In that case, not only would we be taking on an unnecessary burden, but it also hurts our financial position. The payment pulls more money out of our hard earned salary every month paying the principal and the interest on the loan. But many people would think of this boat loan as a “good” debt, if the interest was 0%, and the family can use it to have fun (as if they couldn’t have fun any other way). The debt is still a burden, even if the interest is zero. The payments still need to be made and if they are missed, the boat will be taken away.

We need to get out of the mindset that debt can be classified as “good.” All debt is bad. All debt is working against us and is therefore a burden. If we can keep this in mind, it will change the things we are willing to exchange for that burden. It is not worth taking on a debt burden to purchase a few new toys or go on a fancy vacation. Think long and hard before taking on the burden of debt. The benefit of taking on a debt burden must greatly outweigh the risk and worry that comes along with debt. We don’t need more burdens in our lives.

It is time to stop trying to manage debt and start eliminating it. No more playing games with “good” debt. Start moving in the direction of becoming debt free. If you need some more information on this, please pick up a copy of my book The Doctors Guide to Eliminating Debt and get on the right path to conquering the burden of debt.

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6 thoughts on “There is No Such Thing as “Good” Debt”

  1. I very much get where you are coming from. I feel the same with tax deductions. People get excited to ‘write something off’ like a bad business deal so they can lower thier taxes.

    They still have lost money on that thing, so it’s bad, but people get excited about the write-off and seem to forget all the real money they lost along the way. Then they do a questionable deal again, it’s insanity.

    For the debt being bad: Taking the argument to it’s logical endpoint. It would be is 0% interest debt bad? I guess it still is bad because it’s negative cashflow for a monthly payment. You can likely make more than 0% with some investment which makes for a net positive though.

    I do think it’s net good if you can easily handle those payments AND it doesn’t weigh you down emotionally to have a debt cloud over you. Some people get really weighed down, and that has a large cost to it

    Also, some debt is so small its good to pay it just so that you can forget about it! Regardless of the rates 😛

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  2. I like the thought process with how to think about debt. I especially like the phrase “necessary evil”.

    Classifying things such as student loans with low interest as “good debt” makes it permissible to stretch them out instead of paying them off and investing the added cash flow.

    Really great piece dr. Fawcett!

    Regards,

    Psy-FI MD

    Reply
  3. Eric Tyson coined those terms “good“ and “bad.“

    Although I don’t disagree with anything in this post I think Eric‘s intentions are not to pretend that any kind of debt is wonderful.

    He was trying to come up with a catchy phrase that people could understand to make it clear that buying a vacation they can’t afford on a credit card is not the same as investing in a new business.

    He wants people to minimize debt overall. His distinction is that he prioritizes paying off debt that is on things that go down in value like cars before those that go up like education, businesses, and real estate.

    In retrospect “good” and “bad” may not be the best terms since people generalize it as a value judgment.

    I got behind in credit card payments in residency. Too much car, parties, vacations on credit cards turned out to be bad.

    Now, I haven’t had any debt of any kind for over 15 years. So I may be even more debt-averse than you.

    But looking back I could not have gone to medical school, bought a house, or built a private practice without debt. That overall effect on my life was good.

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  4. After paying off our waterfront McMansion mortgage, we are downsizing. We used the HELOC on that home to purchase our next home (which we are totally in love with…) 9 months later on the market (2 months of owning 2 homes… ) our waterfront property has not sold (almost no showings, very slow market, we will see what the spring brings).

    If we had not committed to the new buy, we likely would have just given up (too stressful!) on selling the waterfront and stayed in a way too big home. Or… if we had the tenacity to ride out the market, we risked over-spending at the time of our home sale ( if the perfect “reasonably” priced home were not available then, we would never have the patience to do “storage and rent “ )

    We are SO debt averse, this is KILLING us!!! (First world problems). Hoping to call this “acceptable debt” (it is not “good”!) Can’t wait to be on the other side of this!

    (PS- If you’d like to buy our house, check it out @2184Shorelane on Instagram )
    -Kristina

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  5. I am curious how you would view someone contemplating getting into student loan debt for a career (such as medicine) that they would not have been able to go into without it?

    The debt is presumably to get into a higher paying career that would not be possible without it, so for me I think this would be an ok use of debt much like the cash flowing rental debt leverage

    Reply
    • I would call it a necessary evil. Most students will need to go into debt to get through medical school. Most people will need to go into debt to buy their first house. Needing to do it doesn’t make the debt good. It will still be a burden when it comes time to pay it off. If you consider it “good” debt, then there is no reason to get rid of it when you can. If it was “good” you could take more of it and take advantage of the situation and borrow $800,000 for medical school. People need to start thinking of debt as a bad thing, something to be avoided if at all possible. When it couldn’t be avoided, then minimize the effect by paying it off as soon as you can to remove that burden from your life. Thinking a debt is “good” can lead you into a bad situation.

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