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Is All Debt Bad? The Other Side of the Story

Is All Debt Bad?  The Other Side of the Story debt 2 Hey, friends!!  So, welcome back to Debt Roundup for another fun and exciting look into the world of personal finance.  Last week, Mike wrote a great article about Good Debt vs. Bad Debt.  I’m not necessarily opposed to debt altogether, in fact, when Grayson took out a loan for his jeep, I wholeheartedly supported his decision.  But just for the fun of it, I wanted to write today about the other side of the story, and how, on at least some level, all debt can be a recipe for disaster if the circumstances are right – or wrong.  So today we’re going to look at the “good debts” that Mike wrote about, and give them a little dissection.

Student Loan Debt

While it’s absolutely true that a good education can increase your income potential, it doesn’t always increase your income.  When considering taking out loans for education, it’s crucial to weigh the cost of the education vs. the field you’re planning on going into.  For instance, $90,000 education for a job in social work that pays $30,000 can mean absolute financial disaster for a single person without another income to help cover the costs.  Another thing to consider is the borrower’s ability/willingness to pay their loan back.  A doctor might spend $150,000 on his/her education, and might soon work up to a $125,000 income.  However, is he/she willing to live like a student instead of like a doctor in order to get those loans paid off sooner rather than later?  Has the potential doctor considered other factors that will eat up their income, such as malpractice insurance?  Too many doctors and other high-paid workers increase their lifestyle along with their income, thereby eliminating the possibility of paying off those student loans in any reasonable time period, holding on to those loans for 2+ decades, and paying a massive amount of interest in the process.  These decisions that can have devastating impacts on one’s financial life, regardless of the career they choose.

Or what if the career a student has chosen, high-paying or not, suddenly becomes over-saturated, leaving jobs in that field hard to come by.  The field of law comes to mind when proposing this argument of job over-saturation.

This is not to say that student loan debt is always bad, it’s simply that before taking out a loan for college, one must weigh all options/possibilities, for the good and for the bad, before taking the plunge into student loan debt.

Real Estate

Many factors also come into play when we are deciding whether mortgage debt is good or bad.  The housing market crash of 2008 is a perfect example of this.  Housing values decreased by as much as 35%, and foreclosures increased by over 81% in the years following the 2008 crash.   People who purchased their homes in 2004-2007 suddenly saw as much as 35% of their equity disappear, and if they hadn’t put any more than the minimum down, they were suddenly underwater on their homes, by no choice of their own.  And the stock market crash that preceded the falling housing values and rising foreclosure rates contributed to the problem greatly by ushering in a great many job layoffs and/or hiring freezes, therefore decreasing incomes for many Americans.  Fault or no fault, it’s never good to be in a situation where you’re underwater on your home, no matter what the cause.  Now, I’m not necessarily saying that everyone should only buy a house after they’ve saved up the entire purchase price in cash, however, it’s wise to think seriously about borrowing such a substantial amount of cash.  A larger than normal down payment and a hefty savings account will do you good if you attain these things before you purchase your house.  And after you buy it, commit to getting it paid off ASAP, as you never know what kind of trouble life can bring.

Business Debt

As Mike pointed out in his post, business loans can go wrong, and Grayson’s story is a perfect example of this.  I had an acquaintance who went through something similar.  He got fed up with his job, quit on the spur of the moment and started his own business.  $100k later, he filed for bankruptcy and lost his house, leaving himself, his wife and kids in a boatload of trouble.  Forbes magazine tells us that 8 out of 10 new businesses fail.  With a failure rate that high, you’d be wise to think twice before borrowing to go into business.  Dave Ramsey’s story is another great example of the dangers of taking out loans to start a business.  At one point, Ramsey owned well over a million dollars in rental properties.  Within 6 months, due to a number of financial problems, many of which were not his own doing, he lost everything to foreclosure, leaving his family struggling for basic needs.  No wonder he’s not a big fan of owing money.

It is true that it often takes money to make money, but before taking out any type of a business loan, it’s crucial to think carefully about what you’re planning to do.  What is the failure/success rate of the business you’re considering borrowing for?  Do you have a rock solid plan in place to ensure your business has the best possible chance of success?  Have you looked at all of the competition for your business?  Is it really a product or service that people need and want, or are you seeing it with rose-colored glasses?  Do you have what it takes to be a business owner?  What is your backup plan for if the business fails?

When my husband, Rick, was laid off from work in 2010, he looked seriously at several business owning opportunities, franchises, start-ups and the purchase of currently operating businesses.  For six straight months, his full-time job was researching business owning opportunities.  In the end, it was a comment from our insurance agent that helped him make his final decision.  Rick was looking at a business that would be complimentary and helpful for insurance agents and their clients, and Rick went to our agent to ask his thoughts about the concept.  While our agent didn’t disagree with the potential of the business, he gave Rick one wise piece of information.  He said, “When I started out as an agent, I spent the first 5 years knocking on doors, asking for business, for a good 8-10 hours a day.  Things are good now, but those were the hardest 5 years of my life.”.  That was what Rick needed to hear to know that, at that time, he would be much happier being an employee rather than a business owner.  All of the fantasies about owing your own business had come face-t0-face with the immense amount of work that comes with owning your own business, and it was a real eye-opener for Rick, and it enabled him to get his head out of the business-owning clouds and face up to the reality that he didn’t want to be a business owner.  He opted instead to take another job in his field, and his income and education in that field have been growing steadily ever since.

Again, not all loans are bad, and there is absolutely a difference, as Mike pointed out in his informative article, between good debt and bad debt.  All debt though, no matter the purpose, should be considered carefully and planned for in a way that considers all potential future hindrances.

Would you feel badly if you had to file bankruptcy on a business loan that didn’t affect your family?  Is business owning for you?

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About Laurie

Laurie is a wife, mother to 4, and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom, and to a simpler, more peaceful life.

44 comments

  1. I agree that not all debt is bad and that it needs to be considered on it’s merits. I for one quite like having a small amount of debt so that I have quick easy access to funds whenever there is a stock or currency trade that I really want to get in on. It gives me the freedom to jump in and out quickly without tying up my own money in an account.

    I also like debt when you can use it to generate more money than the interest that you have to return to the bank. Obviously this isn’t always easy to do, but if you are willing to work hard and actively manage your debt funded investments, you certainly can do it and it really can be worthwhile.
    Glen @ How To Save Money recently posted..Ways to Save Money on BillsMy Profile

  2. I think there are times when loaning money is appropriate – borrowing to buy a house makes sense to me because it would take SO LONG to save up cash to buy a house when in the meantime you also have to pay rent for housing anyway. It helps you accomplish a goal that would be very difficult (but not impossible) without loaning money. You’ve already mentioned Student Loan debt – it pays for itself through better employment opportunities. BUT, I wouldn’t go so far as saying the debt is GOOD. It still needs to be destroyed as soon as possible. :)

  3. The thing abouy spme debts (vehicle/house) is that there’s as asset attached to it. Credit cards debt etc does not. Student loan debt can really go either way. I went into debt but I also now have a career with a lot of potential and make a good wage. I dont have regrets borrowing 75k for a job that pays 60+k per yeat buty friend who borrowed 40k for a fine arts degree is suffering. Ive already started to write about this but never finish the post about how I wish there was a way student loan issuers could give loans based on income potential but that opens a whole can of worms….
    Catherine recently posted..On Building Endurance: Debt Repayment EditionMy Profile

  4. Good article. I generally think of good debt meeting one of two criteria:

    1) income producing – eg. rental property, business loan, etc
    2) option with debt is financially better than the alternative – eg. mortgage vs renting

    However, all debt clearly carries risk and hence for all debt, we need to consider the risk as well as the maths.
    moneystepper recently posted..Paying off your mortgage early – Brian’s storyMy Profile

  5. Great comeback Laurie! You make some great points and you’re right that even “good” forms of debt can lead to trouble. The cost of an education has skyrocketed and if you have trouble finding a decent paying job after school you will find repaying the loans difficult. I think the lesson is to go to a college you can afford and keep loans to a minimum, especially if you’re in a field that doesn’t pay very well.

    Business loans are dangerous too because if the business doesn’t succeed you could lose everything. But I’d still consider it a “good debt” as long as you don’t go in too deep.

    As for real estate…most people could never buy a home without a mortgage. In theory, the home will appreciate in value and you’ll gain more equity with time as you pay it off. Of course, you can get in over your head here too. I actually just posted an article on my blog where I talk about some of my most foolish purchases. Number 1 is our first house…we stretched ourselves to the max and closed on 12/31/03, right before the market crashed. DOH!
    Mike Collins recently posted..My Most Foolish Purchases EverMy Profile

    • Yikes!!! That’s the kind of real estate purchase I was referring to, Mike. We saw SO many people lose houses during the crash because they’d put the minimum down and borrow to the very max in which they were approved for. Mortgages can be great, but not like that. :-)
      Laurie @thefrugalfarmer recently posted..Cutco Cutlery: A ReviewMy Profile

  6. Nice post Laurie! We actually have a family member who had to declare bankruptcy a few years ago and it was just an absolute shame. What’s even worse is that they’re in trouble again, but that’s a different story for a different day. That said, I don’t necessarily think all debt is bad, especially if it’s income producing. However, we’ve come to the conviction that if we have to owe anyone then it’s only going to be for a house and that is going to be for as little time as possible.
    John @ Wise Dollar recently posted..Three Simple Ways to Save MoneyMy Profile

  7. We borrowed money to buy rental property and I don’t feel that it was a bad move at all. We did put down a large down payment though.

    Regardless, if we were ever to default somehow, the bank could sell the homes and recoup their investment. I’m sure that will never happen!
    Holly@ClubThrifty recently posted..Winning: How to Have a Successful Garage SaleMy Profile

  8. Debt always equals risk and loss of freedom. That doesn’t mean we should all avoid debt all the time, regardless of anything. But I agree wholeheartedly with your caution that debt “should be considered carefully and planned for in a way that considers all potential future hindrances.”
    Kurt @ Money Counselor recently posted..Mortgage Payment as InvestmentMy Profile

  9. I actually think student loan debt is the worst debt in this country. There is not near enough guidance and education with kids and their families before they take out thousands of dollars of debt. There are so many great calculators out there now that show you how much you will need to make vs. how much you are taking out but people make those choices more on emotion than research and thought.
    Shannon @ Financially Blonde recently posted..This is Why I BlogMy Profile

  10. I am so with you on student loan debt! People need to seriously evaluate the ROI of their future careers before they dig themselves into massive debt for a job that pays next to nothing. Some of my friends that became teachers have debt that’s double or triple what they make in a year — luckily some can get it forgiven (but that’s a whole other debate…).
    Broke Millennial recently posted..Guess Who’s Back?! (And with a new job)My Profile

  11. I find many people are under the impression that student loan debt is always good, well maybe not good, but worth it. They often fail to consider the ROI.
    Stefanie @ The Broke and Beautiful Life recently posted..Buy or Rent: The Dress!My Profile

  12. Derek @ MoneyAhoy.com

    Debt is great if it is used responsibly. If you are leveraging your money to get increased benefit out of it, then that’s a positive. If you are using it to get the newest shoes, hand bag, etc. then it really can be dangerous!

  13. What is your take on taking out a loan or debt to buy an asset such as buying a rental property?
    Davey Pockets recently posted..Wait, what did Will Smith say about people spending money?My Profile

  14. When I worked for a high net worth financial planning firm, we had a lot of doctors as clients. It was interesting that most all of them had a high salary, a million dollar house, a nice retirement plan, and no money otherwise. Most of their income that didn’t get saved for retirement went towards the mortgage and living life.
    Jon @ Money Smart Guides recently posted..The Real Costs of Mutual FundsMy Profile

    • Jon, when I was in mortgage and personal banking, I saw the same exact thing. People making a boatload of cash and having nothing but stuff to show for it. Then they’d hit 55 and panic because they wanted to start thinking about retirement, had no retirement savings and a mountain of debt. SO many sad stories, or stories of people losing everything because they had too much debt, or debt period. If you’ve got no debt, you’ve got very few obligations, and you can meet them easily even if trouble comes.
      Laurie @thefrugalfarmer recently posted..Cutco Cutlery: A ReviewMy Profile

  15. There is definitely “good and bad” debt, as debt can be a great tool but can also cause you to sink very low in your finances! If the rental market in your area is high and you plan on staying in the area for 5+ years, getting a mortgage can very well be good debt. Especially if you have a low interest rate and put the extra money somewhere that gets you higher returns than your mortgage rate.

    For student loans, it’s the same idea. You have to factor in what the starting salaries in your field are going to be and just how much you are willing to take out. You can boost your future earnings potential without drowning yourself in debt at an expensive private school. Wish I had more knowledge about debt and finances in general BEFORE going to college.
    Debt Hater recently posted..Rocky Neck State Park ReviewMy Profile

    • That’s the problem I see with debt (and again, it’s not about the debt itself but about the borrower) is that people don’t factor in all of that stuff. They just figure that if they can get approved for it, it’ll all be good, but then trouble comes, like a job loss, declining housing market or whatever, and then they’re all stunned and wonderful what the heck they’re going to do. Been there, done that, and it sucks. Not the debt’s fault, but we sure wish would’ve been more wise with our debt and paid it off ASAP as opposed to being so comfortable owing people.
      Laurie @thefrugalfarmer recently posted..Cutco Cutlery: A ReviewMy Profile

  16. I’m definitely an own my own business kind of guy, and I wouldn’t be upset. I hate not paying back money I owe, but when it comes to business, lenders know they are generally taking on a different type of risk. If it affected my family to pay back the business debt, but didn’t affect us if I didn’t…I don’t think it would bother me at all to let it slide.
    Josh @ CNA Finance recently posted..You’re Invited To My PF Blogger BBQ!My Profile

  17. Instead of focusing on whether debt is good or bad, perhaps the conversation needs to shift to the risk all debt creates. Yes, a school loan for college could help you get to that career you want. Yes, a car loan could get you a reliable vehicle. Yes, a home loan can build equity and the house could appreciate over time. But all debt brings risk into our lives. That risk is exacerbated when life throws us in a direction we are not expecting. I’d rather reduce the risk by not taking out debt.
    Brian @ Luke1428 recently posted..How Much We Pay Our Kids For ChoresMy Profile

  18. I know that I wont have enough money in savings to pay for my kids college by the time they get there.. We are certainly saving what we can, but my oldest is already 13.. with the cost of education in today’s world, our best won’t be enough.

    Will I encourage my kids to take out student loans to help them chase down a career? Perhaps.. But I do plan to hold their feet to the fire a bit with their choice of major. I certainly don’t think its worth taking out a $100,000 loan to get a degree in Philosophy. However, to get into the sciences, this type of investment (and the debt that comes with it) may be necessary.
    jefferson recently posted..What It’s Like to Play in a Vegas Poker TournamentMy Profile

    • “But I do plan to hold their feet to the fire a bit with their choice of major.” This is exactly what I’m talking about, Jefferson. There has to be some research, thought and accountability before any kind of debt is taken out, IMHO. Too many times, people simply focus on the first benefit, as in “I want to go to college” or “I want to own a business”, and then go take out a loan. This is where the game falls apart often, I think, because they pick unprofitable businesses or realize they don’t have what it takes to make them successful, or they pick a non-income generating major, or whatever, and then 100k later, they’re like, “Oh, crap!”.
      Laurie @thefrugalfarmer recently posted..Good Reads for the Week Ending 5-17-14My Profile

  19. Great post, Laurie! Most debt is bad, but not all. I hate student loans, but as long as you have a very specific plan of what you’re going to do with your degree and how you plan to pay the loans back, I accept them. Business loans are probably the most necessary debt, though it’s possible to run a debt-free business. Thanks for sharing!
    Kalen @ MoneyMiniBlog recently posted..3 Ways to Start Investing for Retirement With $100 or LessMy Profile

  20. I believe every debt is bad and keep you under immense pressure. I have taken student loan few years back but till now I haven’t able to payback much of it. With the recession, I was unable to find a job which offers good income and stability.
    James recently posted..Three acquitted in abduction, murder of drug dealerMy Profile

    • I used to think that as well, but after some time and education, I have learned that some debt can be useful and allow you to achieve other things. Most landlords need debt in order to buy more buildings, but they are making money off that investment.

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