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Good Debt versus Bad Debt
© Leslie Householder
Author of #5 National Best-seller, "The Jackrabbit Factor: Why You Can"
ThoughtsAlive.com

Another great question from one of our readers triggered this article:

Hi Leslie, I read you article TO DEBT OR NOT TO DEBT, it was an eye opener! Could you please explain what you meant by "there are two things worthy of debt: a home, and education." Did you mean there is good debt and bad debt? The debt elimanation teachers I've sat under say "there is no good debt, just bad debt, and to work hard to pay you home off early." (I know there are many schools of thought) And what about all the students who graduate from college drowning in debt, because they took out school loans, and are paying on them for years to come? (I hear their cries on several debt shows I listen to, many of these show make you scared to dealth to use a credit card). I'm sorry to ask this question, but I guess I need a little more claification if possible. Thank you for all you share to help us improve our lives.... Ellie (name has been changed)

My Reply:

Hi Ellie,

In my opinion there IS good debt and bad debt. For example, I think a person would be foolish to spend their whole life renting because they were unable to save up $100,000 or whatever to purchase their first home. Suppose over a 10 year period of time, they put out $500/mo in rent on a home worth $80,000. That's a total of $60,000 in payments, with nothing to show for it. After those 10 years, the property could easily be worth $130,311 (at only 5% increase/year). If they had put their fear of debt aside and purchased the property instead, their down payment of less than $3000 and the $500/mo payment would have earned them more than $60,000 in equity, simply as a reward for their willingness to manage a piece of real estate. In one way, it was like putting their rent money into a savings account instead.

So with this scenario in mind, who was the fool? The person who avoided debt like they had been taught, or the person who allowed themselves to use "other people's money" in an effort to be self-sufficient in the long run? Depending on the interest rate, it could easily be the same monthly outgo for 10 years. The mortgage company probably received somewhere around $20-40,000 in interest over the 10 year period. Some people would think that's sickening, and grumble about how much of their money went to the debt people. On the other hand, I'd say "good for them!" Because of their service to me, allowing me to partner with them to control a peice of real estate, I'm happy they made money helping me make money.

Do you realize that with $3000 down on an $80,000 house, if you sell it in 10 years and profit $50,000, you didn't just get a 62.5% return (50,000/80,000), you got a 1600% return on your investment, because YOU only put $3000 into it (3,000/50,000). You earned a 5% per year increase on not only YOUR money, but 5% increase per year on the bank's money as well. (I understand, that's not taking into account your monthly payments, but I don't mention them as part of the deal because you'd be spending that money monthly anyway on rent.) So what if you had home maintenance over the years? Chances are, they won't come to anything near the amount you'll retain or even profit from taking ownership.

"Debt" has such a bad wrap because of how the masses use it. They use it to finance lifestyle, with no thought or intention of causing an increase from it. One leads to growth, one leads to bondage. It's good that people hesitate to go into debt, because they should pause to scrutinize the purpose for doing so.

Cars don't generally appreciate like houses do, so I'd only go into debt for a car if I absolutely had to; in other words, if we needed it to go earn our living. We've driven junky, embarrassing cars while our friends drove nice, respectable cars, because we couldn't justify the debt for the luxury of good appearances. "Good appearances" do not generally lead to growth, unless your image impacts your effectiveness as a salesman, for example. In our jobs, the car we drove had no impact on our profitability.

Education is the other worthy reason to borrow money. I don't feel that way so much for a college education unless the salary expected coming out of it can more than cover the debt service that will be required. I think the biggest problem with school loans is that the student isn't wise enough with the money. I don't know how it is across the board, but when I was in college, I had friends who were using student loans... and when the check came, they paid for their tuition, and a stereo, and furniture, and a car... etc. They didn't keep to strict personal guidelines to spend it only on the education, and do without the luxuries until their occupation afforded it. In their mind, they expected life to look a certain way, and that's what the school loans were for: to live life as usual and be free from the job to focus on studying. We scrimped, starved, worked multiple jobs, and slept very little during college, AND spent grocery money on seminars. We could see that what we were learning in school was good stuff, but it wasn't going to teach us how to set up residual income. The seminars were teaching us how to build a life, instead of just earn a living.

Education is a worthy investment... because what you learn, and what you become as you learn it, cannot be taken from you. It helps you grow into the kind of person who can achieve anything they need or want to achieve. You are the only thing you take with you when you go, so developing yourself and your talents is never a wasted investment. There are ways to make in one month what you are accustomed to making in a year. What would you pay to learn how? Do you see how there is a big difference between an investment and an expense? Using other people's money for an investment can be good. Using other people's money for an expense is never good. If you've ever played the game "Cashflow", expenses are called "doo dads."

If you must go into debt in order to make great strides forward, it is imperative that you feel good about the decision instead of looking at it with a sick feeling. Lots of people go into debt for a home or education and feel sick, and that can literally affect their opportunity to glean everything good from the investment that they could have gleaned. It becomes bad debt, simply because of the way they let themselves feel about it. With the feeling of dread for what they have done, they will be more likely to pull out and sell the home at the wrong time, or fail to apply the knowledge they gain from education to create profit because they are so focused on the very thing they are trying to overcome.

Look at it this way: if you want to go from your home in Vacaville, California to Hawaii, and you were bent on following the rule: "only go FORWARD to get there the fastest," you'd drive to the shoreline at Vallejo and get in a boat and start rowing. Good for you that you never turned back! Eventually, after probably a few weeks, you'd end up in Hawaii. On the other hand, if you allowed yourself to go BACKWARD for 30 miles, you could hop on a plane in Sacramento, and get to Hawaii the same day. Should you feel guilty for going backwards a little bit? That's how you can look at debt. In fact, start calling it "other people's money" when you are making a smart investment, and call it debt when you are spending it on something you shouldn't. It's going backwards just a bit so you can get in the vehicle that will take you where you want to go.

I hope this helps... hopefully you can also see why a person's psychology has to be in the right place before these ideas will do them any good. Since this psychology is NOT the norm with the general population, you'll rarely see programs on tv or on the news that speak to the small percentage of people out there who understand this. I've learned that I have to be careful who I talk to about it, because some people are too quick to take advice based on someone else's recommendation without thinking it through for themselves, and then they don't want to take responsibility for the outcome of their thoughts, feelings, and actions if it doesn't work out the way they hoped.

Take responsibility. If you use debt, manage it wisely. Make your payments on time, and always pay more than the minimum. Sacrifice lifestyle to maintain or develop good credit. Be the first to contact creditors if there is going to be a problem making a payment. If they trust that you are more concerned about your standing with them than they are, your ability to have what you need when you need it for continual growth will grow too.








Remember: If you want something to change, something's got to change.

YOU are the only thing you really CAN change. As you do... as you learn to think according to the Principles of Prosperity... everything else will begin to fall into place just as it should. ~ Leslie Householder