“Good Debt” Doesn’t Exist

Oh, hi. I’m assuming 90% of you are here because you saw the title of this blog, had a mini fit, thought about how stupid the writer must be, and well, now you’re here shaking your head and fuming even further.

When I say “good debt” doesn’t exist, most people fire back with the usual responses like:

  • My student loans ended up tripling my income.
  • My mortgage provides me with a roof over my head
  • Investments, my business, my blah blah blah blah and one more blah for “good” measure.

These are all great things. I mean, do I have anything against people who take out student loans for a career that will help them become financially successful?
No. In fact, I did the same.

Do I have anything against people who take out a mortgage on a home that they needed, wanted, and could afford?
No. I’m actually pretty jealous.

But do I have a problem with you (yeah, all of you) who say that some types of debt are good? Yup.

Why? Because of the following sentence I once heard someone (AKA Preet Banerjee) say:

Calling it bad debt and good debt is like calling it good sh*t or bad sh*t. At the end of the day, it’s all still sh*t.

When I tossed the question out to my internet friends, asking what “good debt” was, most of their responses were what I mentioned above.

In my personal (and charming) opinion, one of the worst ones anyone will ever tell you is “the best one” is a mortgage.

I mean yes, I’m happy for you and your home. But what makes us think we can just call that good debt?
Is it the BEST POSSIBLE investment you can make? No. Absolutely not. But is it an investment none the less? Yes.

A house is the one I could argue the most. I mean, if we’re going to call anything “good debt” here (which we’re not), it’s the investment that increased your net worth by a lot more than this:

“Over 30 years, stocks made 8.5 per cent and houses 5.5 per cent.”

So maybe “good debt” isn’t a thing at all. Maybe instead we should call these “good debts” investments, or better yet, side effects of bad and good investments.
Because just tossing an adjective in front of the word debt is pretty easy to do.

Exhibit A

Happy Debt: The type of debt where it’s still debt but it made you happy for a split second in time.

LOOK AT ME, I coined a term.

Maybe the idea was invented by some insanely brilliant marketing agency who was trying to sell the first piece of property ever.

“You know what would go great with that cave, sir? A ridiculously high mortgage.”

Wait a minute… who did invent the term “good debt”? I mean, where did it come from?

I seriously looked/researched/crawled into the deepest darkest corners of the internet and found nothing.

Because obviously no one would want to admit that they invented the term for a sales tactic.

THE HORROR.

So let me just do as they do to us millennials, and reverse-back blame the boomers. Hey guys, thanks a lot.
Just kidding – but it does feel good to blame someone. It’s all starting to make sense now.

All in all, I get it. You want a reason to justify your high-expense costs, your money mistakes, your successes that caused you struggle, your everything’s ever.
But can we please start just calling it what it is?

*stares at you and mouths the answer*

It’s debt.

And putting the word “good” in front of debt shouldn’t make people feel more comfortable to hold onto it.
Because in 2016, we take everything literally.
And if I say a mortgage is good debt, people will take ownership of that debt like it’s more of their baby than well, their actual baby.

Most people take on debt because they want to increase their standard of living.
And guess what? There are no guarantees with debt (other than the guarantee that you have to pay it back).

There is no guarantee that you’re going to invest money into a home, degree, or business, and then come out on the other side to a “YOU’RE RICH! WELCOME HOME” sign and fireworks in the shape of dollar bills. Man, my imagination is on point today.

So now how much do you want to write a comment hating on everything I’ve said above, OR how badly do you want to scream “YASSSS QUEEN”? The floor is yours.

47 Responses to ““Good Debt” Doesn’t Exist

  • Debt is the worst. All debt. Period. My mortgage is my albatross. I hate it every single day. Sure, there are glimmers of hope (we’ve paid another $20k+ towards it this year, not including interest). I really do love my house, and I love being close to my friends and family…and my work. But the fact that I’ve paid $8,000 in interest this year makes my skin crawl. It is such a slow slog to battle six figures worth of debt.

    • I totally agree! Interest is that nasty relative you don’t want to see anymore, but have to anyways because it’s the holidays.

  • Samantha
    5 months ago

    There’s an important point here that I think you just barely failed to articulate, and I will probably have a difficult time doing it as well. First, let me preface by saying I absolutely agree – there is no such thing as ‘good debt’. But I think when I argue this point with other people, we are not talking about the same thing. For instance, if I say “there is no good debt” and you say “A student loan of $30k that increases income $30k a year is fantastic debt.” I can agree with you that gaining higher education for a wonderful career is a good idea. But what we are both ignoring is the fact that these things (house, college, business) are all possible to do WITHOUT GOING INTO DEBT. Does that make sense?
    I agree with you – living in a cute little house in a safe neighborhood with your family is a wonderful plan. Try to save money and pay for as much as you can on that house before getting a small mortgage! Don’t talk yourself into a mini-mansion and call it “good debt”. Same with a car, or even a college. Calling it “good debt” let my college friends rake in giant loans for their living expenses instead of getting part-time jobs while studying.

    I am not arguing that you should not buy a house or go to college. By all means these are wonderful choices for many people (myself included). But the credit industry has spent a lot of money trying to keep you from realizing that you can do these things without borrowing money. Even starting a business these days is extremely easy without a credit line!

    • There’s a difference between something that is necessary and something that is good. And you’re right that it can get slippery in that people often justify debt (or more debt/large debt) as necessary debt.

      My mortgage was necessary. But I will never, ever call it good.

    • Very true comment, and thanks for sharing Samantha! Sometimes (always), people choose the easy route because it takes less time, and it can get them to their endpoint faster. Which is pretty fair, and I’ve done it myself. All I mean is, stop telling people that’s a good decision – because it’s not. There are better choices and better options for your money.

      It’s like that movie “He’s Not That Into You”, there are always the “exception” stories.

      My BFF Patty’s husbands second cousin leveraged his debt to make an awesome return.

      Okay, well let’s probably not tell people who don’t know how to do this that it will work for them.

  • YES. I totally get what people mean when they say good debt. BUT (just like you say in your video which is fabulous as usual) it normalizes something that was NEVER SUPPOSED TO BE NORMAL. I love my house, but I don’t love my mortgage. My house is good, the debt I incurred to get it, on the other hand, is not.

    • I knew I could count on you to understand where I’m coming from, Kate 😉

  • Really good points, and I agree that putting the word “good” in front of debt is not the best idea. As you point out, I think there are varying degrees of debt. All debt sucks, but some can be used as a tool to increase your financial situation. Investments are never guaranteed, but some are better than others. Student loans and mortgages can be useful in the right situations to increase your financial outlook long-term, which you identify in your post.

    Instead of calling this type of debt “good” debt, what do you think would be a better classification for it? Maybe “purposeful” or “mindful” or “investment” debt? I don’t know, doesn’t have a great ring to it, but I still think it’s important to classify some debt as “bad” while some is considered a different classification that is taken on as a calculated risk to hopefully improve your long-term financial situation. I hate having student loan debt, but at the same time I don’t regret my decision to incur it, and in time I’m confident it will have helped me build a much bigger future.

    Hopefully my comment is clear, I definitely agree with you that thinking of debt as “good” is a bad mindset to have and it wrongly normalizes carrying debt. Even debt that is incurred for the purpose of a long-term benefit should be paid off as quickly as possible.

    • Let’s just call them that – calculated risks! I didn’t hate all of my debt either, but that doesn’t mean it was the best possible decision. We are definitely on the same page with labeling something “good”, because people tend to take it way further than necessary (especially with money).

  • I like what you said about debt allowing one to increase their standard of living. That’s how I tend to feel too. Debt is almost by definition lifestyle inflation if you could not afford the item with cash.

    I think it becomes a different analysis when you have the cash but choose to take on debt anyway. But how many people does that apply to? Where does that take us? Does that mean only the wealthy folk should be taking on the purchase of a modest house? That doesn’t sit well with me, but I feel like that’s where we’re headed if we are rigid in the thought that debt is not permissable.

    For me, It felt incredibly freeing to not have debt after I sold my condo. Even if it might have been more financially beneficial to use the mortgage leverage and tax deductions. The downside is that no longer have a permanent home. I was on track to pay off my mortgage at age 42 because i refinanced to a 15 year loan at age 27. But at least I don’t have any more surprise repairs or tenant vacancies.

    I would expect that I might take on a mortgage at some point in the future, because in my country, the government really does subsidize that life choice. I’ve also heard some people have paranoia that they feel like they have less of a target on their back with potential lawsuits if they have a mortgage attached to their property.

    • Lifestyle inflation is so many people’s worst enemy in today’s world. I agree, if you have the money and taking the debt is going to help you make more money then that is reasonable. But there are not enough people who understand this concept.

      Seriously appreciated all the detail in your condo story. So much behind those numbers.

      • All the thanks to you, friend! Without pondering my comment on this post, I’m not sure I would have been inspired to post the condo one.

  • Agree. Agree. Agree.

    I have a mortgage and I tell everybody how much I hate it every chance I get. It’s like people think it’s normal to have debt, because EVERYONE has it. Even cell phones, I swear people don’t realize that having a payment plan on an iPhone is basically a loan. ON A PHONE. I had a conversation today about it – I told my coworker how I spent $400 on a used iPhone and she said why would you do that when you can get a brand new one for $30/month? When I pointed out that $30/month for 2 years is over $700 she didn’t seem to understand.

    Rant over.

    • Hahahaha classic! A little bit of basic math goes a long way.

  • “Good debt” is definitely a misnomer applied to investments. If you can get a loan at 3% a year then invest and get a return of 6% then you have made some easy money!

    The trouble comes when people delude themselves that the consumer goods they buy are investments. (https://en.wikipedia.org/wiki/Choice-supportive_bias)

  • What is good debt, that is easy. Debt that other people owe you! (savings account, government bond, annuity, etc…)

  • One more comment I want to make, is to make people think about what a loan actually is. When you buy a banana or a burrito we know we are buying food. What some people may not realize is that when you get a loan you are essentially buying time. Time is incredibly valuable and so buying it has a cost (interest). As mentioned above you can save up to buy a college degree or a house if you want. There is nobody stopping you from doing this, but it does take time. What a loan allows you to do is effectively buy the time it would take you to save for that item in exchange for interest payments down the road. So when you decide to take out a loan for something you have to do a value judgement: what is the relative value of your time vs. the cost of the loan. Which is more valuable? The answer to this will be different for different people in different situations.

  • I had been saving for a new car and was ready to purchase.My savings were earning 3%
    After having negotiated the best deal I could on a cash basis I decided to take up the manufacturer’s offer of 0.9% APR with 3 months of no payments. (i.e. waived)
    Kept my savings intact but effectively reduced my interest on it them 2.1% BUT I saved an additional $3150 by not having to pay 3 months of the financed amount.
    That debt I saw as “good” financial practice.

    • Thanks for sharing this perspective Colin! I think I could swing vote and side with you on this form of debt.

  • I could have sold my investments to purchase a home but instead I took out a mortgage at 2.4%.

    My investments continue to pay dividends at a rate more than double the interest I pay on my mortgage. Yes, there are additional risks with using leverage but I wouldn’t call it bad debt.

    • I wouldn’t call it bad debt either. But it’s debt none the less 😉

      • The title of the article is “Good Debt Doesn’t Exist” …

        This debt allowed be to maintain diversification across my portfolio and generate higher returns than I could without debt. Sounds like good debt to me!

  • Jeff M Sielicky
    5 months ago

    To say houses return 5% is misleading. First of all they return 5% plus give you a home. Remove the home and you have 5% plus 3-10% in rental income. My total return on my rental homes over 20 years was over 20% compounded annually.

    If stocks are so good go borrow a million dollars and buy stock. What, the bank won’t loan money against paper assets? Hmm, maybe they know something.

    • That statistic is from the Globe & Mail – so as much as I’d like to argue it, that says all I need to say right there. Those returns you mention don’t include renovations or interest do they? What’s your return after you calculate that in?

      The banks don’t make a profit off of those paper assets, is that what they know? Thanks for taking the time to comment!

  • I can’t agree that there is no “good debt”. I think the world runs more complicated than simply asset or debt. But I do agree not everyone can handle hassle or free cash well so they shouldn’t start calling debt as good.

    I have two loans – one at 1% interest rate and another at 0% interest rate. The rates are fixed for the next 15 years.

    I am not a risk taker so I put the loan in low-performing fixed deposit at 3%, meaning every year I get some pocket money.

    • I like what you say about not everyone being able to handle these things, which is kind of what I’m getting at. It’s dangerous to label something as good without the understanding to back it up.

  • Student loans were the first example that came to mind and I just wrote in recent article that I thought it was good debt for the reasons others did as well. My wife took out $30k of student loans to become a nurse practitioner and it will pay off in the long run. I think the quote is the best way to shape it, good sh*t and bad sh*t. Did we want to take out the loans? do we wish there was a possibility that we didn’t have to incur debt to fund her education? Of course. But with the expenses of school, it just wasn’t a reality. Whether it is good or bad debt, we are looking to pay it off as quickly as possible because at the end of the day it is still debt. Just because it helped increase our earning power doesn’t mean we are going to keep it around for a while because it is internally classified as good.

    Don’t know if this helps or if this just re-inforces the point of your article. Just wanted to share my thoughts. Thanks for the great read!

    Bert, One of the Dividend Diplomats

    • Definitely a good thought to add! Whether it’s reinforcing the point of the post or not, I still loved to read your perspective!

      Thanks Bert 🙂

  • I can agree that most types of debt are bad (eg. a loan for a car/holiday), but I do think there is such thing as ‘good’ debt. As someone commented above, perhaps ‘good’ isn’t the best word for it, maybe ‘investment’ debt is more accurate to describe the kind of debt where you borrow money to make more money than the interest you pay.

    This explains why some people say things like college might count as good debt because you get a loan but in the end you (hopefully) earn more money than it costs. Of course, this isn’t true for everyone who went to college, so there will be many people who disagree with this example. So not all college loans are good or bad.

    The same goes for mortgages. Getting one on a house you choose to live in yourself is arguably ‘bad debt’ as you’re using up money on a liability, and you are chained to the house (therefore the bills, your job etc), which is why a lot of people in the comments are regretting taking out a mortgage. However, getting a mortgage to buy property to rent out to other people is arguably good debt as long as the rent is covering your mortgage payments (and your rent since you didn’t buy) and making extra on top.

    In other words, if you’re making a profit from you debt, you can make a case for borrowing as much as possible to make more (ie. ‘good/investment’ debt) but if you’re taking out loans to spend on things that don’t put more money back in your pocket, then that’s bad debt.

    • I can roll with “investment debt” as opposed to “good debt” haha.

  • I think of debt as acceptable and unacceptable risk. I have both in my portfolio right now. I have the acceptable risk of my huge student loans. The interest rate is higher than I’d like, but there are multiple options for me to keep my payments affordable while I focus on increasing my income. I have the unacceptable risk of my credit card debt. It’s currently being blessed by a 0% transfer, but the APR will jump right back up if I don’t pay it off before the allotted grace period.

    • I really like this perspective. I think the term acceptable and unacceptable is much more real, but also still gives a stigma that debt can be okay to hold onto. Although, I know you’re capable, so I’m cool with that 😉

  • Great post. I’m pretty close in opinion – I wouldn’t personally consider ANY debt “good” – but some does bring benefits that outweigh the weight of the debt itself. As you illustrated – a mortgage, or a student loan that results in a great career – are a couple examples I’d illustrate.

    That being said, I have a mortgage and while my home is worth significantly more than what I owe, I still don’t consider it good debt – it was a necessary evil because I couldn’t pay cash. I just lucked out that my property (and the market) appreciated and we timed the purchase right.

    The closest thing to “good” debt that I can personally think of, is reward credit cards. I often take them out, meet the minimum spend, earn a bunch of points, travel, and close them a year or two down the line. My credit score has actually jumped up after doing this, and I get free travel. In all fairness, I don’t carry balances on this, so whether or not you’d consider it debt, is up to you. I’m not saying it’s for everyone (it requires a lot of discipline and thought) – but in my case, I feel that I’ve been rewarded for taking on “debt” even though I technically owe nothing. Just my $.02 🙂

    Keep up the great work.

    • Hit submit too quick. Corrected below..

      “As you illustrated – a mortgage, or a student loan that results in a great career – are a couple examples I’d agree with.”

  • Interesting article and I’d definitely concur that all debt belonging to a person is bad debt, I’d also add into the equation the term ‘ necessary debt ‘. Not many people who wish to be homeowners have hundreds of thousands of dollars sat around for when they find their dream home or are able to pay their way through college or university without having to borrow to fund it. So I think this needs to be taken into consideration when banding around the term ‘bad debt’

    • I actually really like the term necessary debt. I can dig it 😉

  • I’ve never been fond of the term “good debt” either. I love that you brought up the fact that it’s a sales tactic. I agree!

    To that end, I don’t really like the term “bad debt” either for two reasons. First, people feel bad enough about debt without the need to call it “bad.” Second, I feel calling it bad debt will make people say “I really need to go out and get some good debt!”

    I like to call it necessary and unnecessary debt. The only necessary debt that I can think of is a mortgage because it’s really hard to save up enough cash for even a small home. Every other debt, including student loan debt is unnecessary.

    Great article!

    • Unnecessary debt is a great way to look at it. I totally know what you mean about trying to find the funds to purchase a home. Doing that in one swing is, well, near-impossible.

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