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Why Debt is Good – a Guest Post

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If you knew me at all, you would know within 0.01 seconds that I didn’t write this article. I am definitely a no-debt person and always do my best to steer clear of debt at all costs (in fact, I’m recently debt free again!) I do feel that it’s good to have an opposing view once in a while though, so let’s hear what Bob Richards, author of The Retirement Blog, has to say about why debt is good. I encourage you to leave your comments! I know I will! 🙂

Some people think that getting out of debt is good. This author disagrees.

In this post, let’s address good debt and bad debt.  Let’s also address the way poor people and rich people think differently.

Bad debt is usually stupid debt.  Who in their right mind would ever borrow money from a credit card company at 19%?  Who in their right mind would ever borrow money to finance a consumable such as a vacation, shoes, eating out, food, etc. as once you consume the item, it is gone but you still have the debt?   So unfortunately, there are people who use debt, a lot of them, who just don’t think straight about money.  Generally these are poor people.

It’s not that poor people are stupid; they just don’t think about money correctly. In fact, poor people are not necessarily people who have little money. You may have seen documentaries on television about people who win the lottery and are then broke in two years. These are people who at one time had money.  A poor person who gets money will end up poor because they have wrong thinking. Generally, poor people think that money is for spending.

Rich people are a different kind of cat.  Rich people do not use debt to buy consumables. They only use debt to buy assets that endure (e.g. businesses, real estate, other assets that will generate money). These are investments (poor people don’t usually grasp the difference between spending and investing).  Rich people don’t like to spend money (and thus, the stereotype of the billionaire who still clips coupons).  Additionally, they want debt because in many cases, they can borrow money at say 1% and then invest it to get 6% (this is how banks make money).  Poor people would also like to do this but they generally never accumulate much money because, well, they are poor people.

Note that a poor person can become a rich person.  They just need to adopt the right thinking.   You have read many accounts of people born in poverty that became rich.  This author had a very middle-income childhood; my father sold home appliances and my mother was a bookkeeper,
neither college-educated.  But their son went on to get a Harvard graduate degree and have a million dollar net worth at age 34.  See the move Pursuit of Happyness (a true story) with Will Smith.  It’s an example of a poor guy that becomes rich.  Of course, he takes actions that few
people are willing to take and most importantly, thinks like a rich person.

Back to why the right type of debt is good.  I like my house.  I have debt on it.  Had I not borrowed to buy it, I could not have purchased it years ago. I did not have all that cash.  So I live better because someone let me borrow money. The debt costs me about 3% and I can comfortably earn 8% on that money.  Where can you earn 8%.  There are many ways but one way is that I lend money to poor people.  I don’t know if they are
poor or rich but I lend money to people who have ruined their credit (i.e. they think like a poor person and have used bad debt) and cannot get cheap money at the bank.  So I lend them money on their homes at 8%.  They can pay me back any time so they are not forced to pay that rate.  I am not a vulture.  If it weren’t for me, they would lose their home. At any time they qualify, they can go to the bank and get the “rich person’s rate” of 3% and pay me off.

Another reason rich people like debt: most countries in the free world are democracies which results in elected officials spending more money than is raised by taxes.  This causes inflation over time and the devaluation of the currency.  So when you have debt, you pay off an item that has a lower and lower value over time. In other words, if a piece of real estate doubles in value over 10 years, the fixed debt on that property is paid off with money of lower relative value.  Here’s the example:

Property Original value: $500,000
Original debt : $200,000
Debt as % of property value = 40%

Ten Years Later

Property value: $1,000,000
Original debt still owed: $200,000
Debt as % of property value = 20%

I have a business.  I have debt on it.  I was able to expand and grow my business by borrowing money.  I comfortably make payments because the rate I earn on the money borrowed is more than I need to pay each month.

The use of good debt (for investing) allows one to live better, have more things to enjoy and in general, live more prosperously.   The lack of respect for debt and using it inappropriately can easily lead to poverty.

I suggest you stop thinking about getting out of debt.  Rather, seek to get out of bad debt, get into good debt and start acting like a rich person.

Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

12 Comments

  1. The only debt I had (except for occasional car loan) was mortgages! They were for homes and income property. It is a great way to leverage your down payment and use a low interest loan to increase wealth.

  2. I defintiely agree that there is a difference between good debt and bad debt. I have a good amount of student loan debt with under 2% interest rate. I am not in a hurry to pay it off, there is better use of my money.

  3. While I agree that there’s a difference between good debt and bad debt, I think Bob simplifies things too much. I know a lot of “rich” people who spend their life consuming. I know a lot of “poor” people who spend their life working, save money, live simple lives, but are still poor.

  4. I definitely agree with Alex on this one (sorry Bob). It sounds all well and good for your houses to appreciate in value and be worth more than the debts you owe, but what if they don’t, and what if your cash flow runs dry and you’re not able to pay the bank? This can happen very quickly when you have a lot of debt. I would much rather make slightly less money and avoid all the risk.

    • similar to mortgages, to invest to start or buy a business. Leverage has a place when the investment is for lasting value, an item that will appreciate or pay dividends.

  5. I got debt (mortgage) free early this year and I have become a laid back person … I feel, I was more active when I was in debt and had a goal of being a debt free 🙂

  6. I’ve been waiting to see a post that addresses this issue–great insight. Debt also teaches valuable lessons about the importance of saving and budgeting correctly.

  7. Your house is not an investment to leverage. Neither are personal loans. Leverage your rentals all you want, though!

    • I agree with that to a certain extent Jenny. I still don’t agree with buying 10 rentals on credit and owing a million bucks. I think there should be a realistic limit to the debt you’re leveraging.

  8. I agree with you, debt is good as long as you are acquiring good debt and not the bad one.
    The riches men know this and every person in the world should too for them to have a better financial life. Right?
    I hope many can read this kind of posts.

  9. The other things you can consider are loans for people with poor credit, such as the bad credit debt consolidation loan. They are typically loans just the same as any other loan, but because you may be considered as a risk, the interest rate will normally be higher, or you may have to provide some form of collateral such as a home or vehicle as security for if you find yourself unable to meet the payments requested. This is one of the downfalls to when you want to borrow money with bad credit.


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