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.
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.
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?