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”.
- 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.