Not all debt is bad.

My friend and someone in the industry that I look up to, Michael Antonelli, mentioned that someone should start covering financial myths. When I saw that, I knew my young audience would benefit from reviewing the general rules of thumb their parents, friends, or coworkers may have instilled in them. There are a ton of financial myths out there and I look forward to covering more each week. 

Some financial influencers and prominent financial figures will tell you never to take on debt, no matter what. This can be misleading and close doors before young professionals even get a chance to consider the potential of using debt to further themselves professionally or financially.

There are certain types of debt you should try to avoid at all costs. One of them being high-interest credit card debt. This can be financially crippling and take years to overcome. With interest rates averaging 22.75%, the debt compounds swiftly and can lead to small amounts becoming a much larger burden if you let this debt fester. 

However, there are some types of debt that I’d say make sense. Student loans, business loans, and mortgage loans. Now this may ruffle some feathers in the anti-debt community. You have to understand that when you take on debt, you are taking on risk, but these forms of debt can allow people to capitalize on opportunities that otherwise would not be available.

Thoughtfully mapping out the debt you will take on is a must. This will allow you to fully understand whether it is worth it or if you will be spreading yourself too thin. We help clients with this all the time! People need a professional opinion on whether the debt they will take on financially makes sense. 

Roughly 34% of all homes are purchased in cash. This means that a staggering 66% are purchased with a mortgage loan. The mortgage loan has assisted millions of people in their goal of home ownership. We can argue that renting is better than buying in today’s climate but that is not the point I am trying to make. Using the mortgage loan, or debt, in this scenario allows people to live the life they want. Not everything must be optimized and in personal finance, we find that more often than not things are not optimized. Life is not lived within a spreadsheet. 

Business loans and student loans fall into a similar category in my mind. They both serve to increase an individual’s earnings. This can even be roughly outlined with projected earnings, interest rates on the loans, and time frames to come up with a ‘breakeven’ point. So many small businesses need capital to start or grow. This debt can even be vital to their success. If everyone was in the boat of “all debt is bad,” there would not be many businesses at all. The same goes for student loans. Students are taking on the risk of borrowing money for the potential reward of earning more than their peers who did not pursue further education. It is hard for me to believe that all debt is bad when I have watched my peers invest so much in themselves to increase their earnings power. I am sure that you are all familiar with someone who has taken on student loans to pursue their passion and build a career. Again, if all debt were bad no one would ever take out student loans. 

The most important piece of taking on debt is to be educated. Do you fully understand the implications of the interest rate and term of the loan? Will your earnings potential outweigh the interest rate associated with the loans? Is this something you really want? Can you roughly quantify when your breakeven will take place? Do you have a pay-down plan in place for when you begin earning more? (Please note that loan forgiveness is not something that should be counted on; having a plan for pay-down is incredibly important).

If you have trouble answering those questions, especially if you are unsure of what you want, you have to think twice about taking on debt. One thing about me is that I cannot stand people who make blanket recommendations. Saying “all debt is bad” is so short-sighted. I think a better saying would be, “Taking on debt without fully educating yourself is bad.”

Debt is a tool that can serve us if we are aware of its implications. There is always risk associated with taking on debt. Having a plan, understanding the debt, and having sound reasons as to why we are taking it on can allow us to use it to our advantage without just writing off our goals because someone said, “All debt is bad.”

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!