Debt Nation: Is There Such Thing As Good Debt?

We’ve heard
of “white lies” and “half-truths” – ways to express opinions by sugar-coating
what is essentially the truth.

We resort
to making white lies in order to justify an action. For example, “I didn’t tell
him the truth about his girlfriend’s indiscretion so that he won’t get hurt.”

Time will
reveal the truth. And whether it is tomorrow, the following month, or next
year, your friend will inevitably learn about his girlfriend’s indiscretion. It
would have been better of you to tell your friend right away so that his
process of healing would start earlier.

A lie is a
lie regardless of how you colour it.

In the same
way, a debt is a debt regardless of how you categorize it.

All debts
are bad. There is no such thing as a “Good Debt”.

Where did this
idea of the existence of good debt come from?

The idea of
good debt is nothing but a justification for acquiring debt. Here are key
examples of “justified debt” that people often classify as “good debt”.

1. Housing Loan

Home
ownership is not just the “Great Australian Dream”. It is the great dream of
everyone around the world. Nothing says “You made it” than owning a piece of
your country’s land.

But real
estate is the biggest expense you will ever make. Most people who buy land
cannot buy it in one shot. They need to pay it off in instalments through home
loans.

“It’s for
my family.”

“It’s an
investment – in a few years, I will double my money!”

Unless your
monthly amortization is lower than 20% of your monthly income, the loan will
not be sustainable. You will lose your home and more. As for the investment,
real estate takes time to appreciate. You might be lucky to sell it and make a
decent enough after-tax profit.

• Car Loans

“A car is a
necessity, not a luxury.”

That’s how
most people justify their decision to purchase a car. But why do you need a
brand new one? Why not settle for a used car?

“A car is a
depreciating asset. A used car is fully-depreciated. The repairs alone might be
more expensive compared to buying a new car.”

Yes, except
that your brand new car is also subject to depreciation. Are you willing to
secure a loan and pay two to three times the cost of a used car to minimize the
cost of repairs?

If you take
the time to look around, you can find a used car that has been properly
maintained and still runs very well.

• Student Loans

The student
loan crisis is the biggest obstacle to the financial success of many
millennials. They have acquired so much debt in student loans that they are
paying them off from their present day earnings.

In the
United States, the average student loan debt is $37,000 and overall, it has
risen to $1.4 Trillion.

As a
result, millennials cannot enjoy their success. They cannot buy homes, start
families, or re-invest in their businesses.

When you
are mired in debts that you cannot cover your day-to-day needs or support a
family, you are in a bad financial position. Even if you acquired the debt to
pay for an urgent need – medical emergency, graduation/birthday expenses, and
school tuition – it does not change the debt from bad to good.