People need to “get” that debt is mostly bad. Somebody always profits from debt and its usually not the borrower.
Borrowing against an asset that depreciates is dumb. I’m talking about people that can’t afford to pay cash for that new TV and they think that it’s a good idea to buy it on a credit card and make minimum payments at 19% for the rest of their life to pay it off. Just because the credit card company will let you do something doesn’t mean it’s a good idea.
Good debt is the type of stuff that you borrow money to buy, like a house. If you can buy something on credit that appreciates at a greater rate than the interest that accumulates on the loan, that can be smart. Unfortunately too many times experts have pointed out that a home is usually not an asset. Also as the real estate market has demonstrated in the US, home prices don’t always go up.
Another type of debt people think is good but usually isn’t is student loans. As a rule of thumb if you are borrowing for an education, make sure the job you can get after the education is over pays you enough to pay off the student loan debt within 5 years. Too many people get stuck in the trap of paying student loans off over a lifetime because they didn’t think about the cost of borrowing, or studied something in school that lands them a job that pays peanuts.
I had a conversation with some fellow entrepreneurs the other day about MBA’s and their worth and we all agreed it would be smarter to take that money and use it to fund a start up business, tons more would be learned, and there would be a chance to make money. But that’s another story.
The bottom line is everyone should strive to be totally debt free. Debt sucks, and even if it may look like a smart buy there are often external circumstances that can prove you wrong as times passes. Even if the value of that asset depreciates, you are stuck with the debt.
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