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Good debt is buying something such as a house that appreciates over time. Bad debt is buying things such as a car (as well as a boat, RV, flat screen TVs and other "toys") that lose value over time.
Well, credit cards are good debt ONLY in the sense of the short term convenience and security they provide, such as buying online or making travel arrangements. As long as you pay the cotton-picking things off every month.
I would tend to call the other views (where folks think they are making bank on the margin) as rationalizations. Folks have lots of good explanations for all sorts of things, but that does not make them so.
Your view doesn't make sense at all. If there were no "good debt" then the economy would come to a standstill (no need making wise cracks about temporary economic hardships here). There is most certainly good debt, and people are making fortunes knowing how to utilize it.
There is most certainly good debt, and people are making fortunes knowing how to utilize it.
And many are going bankrupt for utilizing it. But you seem to be thinking of debt from a business point of view rather than a personal finance point of view.
Debt can make sense for a busienss and at times its a necessary evil if you want to grow. But it comes with a high cost too, its very risky. As a result, even in this case calling it "good" is a bit odd. But from a personal point of view there is nothing good about debt. What is good about student loan debt? Mortgage debt? Nothing really. You can always do without it. Where as a business often has to risk the farm into order to grow waiting to save capital may be just as risky due to what your competitors are doing.
Good about student loans - you got yourself an education that doubles your income that you otherwise wouldn't have been able to do.....GOOD debt
Purchasing a home to live in, mortgaging an amount you can easily afford at say 6% after tax savings the real rate is say 4%, and you invest your money elsewhere like a T-Bill (guaranteed return) at say 4.5%, your making .5% for doing nothing.
If you want to be super fiscally conservative, go ahead and not use some good debt, it'll just take you alot longer to save as much $, but you will have less risk. You will never have 0 risk as you will always have be indebted to the Government through taxes.
s you will always have be indebted to the Government through taxes.
Talking out debt actually increases your tax burden. You have to pay taxes on the interest, yet the interest doesn't do anything for your standard of living. Someone debt free can live the same lifestyle on less income and therefore pay much less taxes given the tax system is bracketed.
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Purchasing a home to live in, mortgaging an amount you can easily afford at say 6% after tax savings the real rate is say 4%
The savings isn't this high for a lot of people, in fact there is no tax benefit if you purchase a house equal to or less than 130k~150k (depending on the state). Right now the national median is $200k, so even if they had 100% financing if their original rate was 6% their effective rate would be approximately 5.4% or 5.6% depending if they are in the 25% or 15% tax bracket (someone with a 200k home is unlikely to be above the 25% bracket). I hope you don't tell your clients these sorts of things....
Never purchase a house if the difference in tax savings that may or may not be able to be taken at full benefit makes or breaks your decision to purchase a home. Please don't turn this thread into a realtor bashing free for all.
I make no representations that I am a CPA or tax advisor and should have put my disclaimer on anything involving the potential tax benefits of homeownership.
Either way it was meant to be a very general concept of using good debt to leverage even better income.
Of course there is good debt. Businesses use debt all the time to capitalize on future profits (time to market, etc.). As long as the NPV (net present value) of the cash flows from debt are better than not incurring debt, than taking on debt is financially more profitable. The break even point (payoff period) of the debt incurred would have to be shorter than the amount of time it would take to save up the money (as well as opportunity costs on both sides).
Also, taking on debt with a fixed payment may be better than saving cash for the same item. If inflation erodes the value of savings, and supply/demand increases the price of the good (ie, college education gets more expensive or the costs of the capital equipment gets more expensive) then the fixed real rate on the original debt would be better than waiting and saving for the purchase.
Likewise, taking on debt for a college education (in a degree that pays) or a vocational trade (mechanic, electrician, heavy construction, etc.) school is better than continuing on in a job that doesn't pay well. As long as the NPV of future cash flows beats the NPV of current cash flows and the time it takes to save.
Furthermore, most States and the Federal Government gives education/continuous education tax credits.
Your view doesn't make sense at all. If there were no "good debt" then the economy would come to a standstill (no need making wise cracks about temporary economic hardships here). There is most certainly good debt, and people are making fortunes knowing how to utilize it.
No cracks intended, wise or other.
All I am advocating is stepping back from the three-card-monty of the numbers games going on, and seeing what is really going on. And yeah, I completely follow all the math -- I had to cover all the business and economic debt models for what is called Engineering Economics, and now again, as folks are pushing me to get my PE.
But you have to be aware that it is just a game. Debt is no more required to run an economy than is surplus, but surplus is a much a safer and sensible place to be.
Look at the real meanings of the words -- Debt -- lack or shortage. Surplus -- abundance and wealth. No math there, and it should be rather obvious to most folks which is the better path.
Seriously Snake -- try this for a year -- live in surplus. It is a very pleasant and peaceful place to be. Then come back and tell me of the wisdom of debt (shortage and lack) for running a life, a business, an economy or a country.
The only folks debt really serves are the debt merchants.
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