Why You Shouldn’t Be Afraid of Debt

What is your relationship like with debt?

Personally, I’m a little fearful of it. And to some extent that’s a good thing. If you’re going to go to one extreme, it’s better to avoid debt altogether than to take it on without thinking. That fear has kept me out of debt of any kind so far, which has largely made it easier to chase some of my bigger goals.

But the reality is that it’s not an either/or between never having debt and having tons of it. It is entirely possible to use debt to your advantage in certain situations, allowing you to do things you couldn’t have otherwise done and potentially allowing you to live a happier, more fulfilling life.

And if I allow my fear of debt to take charge, I will never give those opportunities a fair chance. I’ll make financial decisions based on emotion rather than reason, potentially making it more difficult to reach the long-term goals I care about most.

What I would really like to do is find a way to approach debt with caution instead of fear. I’d like to remain vigilant about avoiding debt we don’t need but stay open-minded to debt that might help us reach our goals.

Let’s see if we can take some steps in that direction.

What is “good” vs. “bad” debt?

Before I can look at debt without fear, I need a definition for what I would consider “good debt” and what I would consider “bad debt”. If I can get that nailed down, then any specific situation can be evaluated against that definition instead of my emotional reaction.

Now, you hear people talk about “good debt” and “bad debt” all of the time, usually lumping things like mortgages into the “good debt” category and credit cards into the “bad debt” category. But that approach never really made sense to me. After all, I don’t think that buying a house is always a good decision, so how can all mortgages be considered “good”?

Instead of grouping debts as “good” or “bad” based on the type of loan, I think it’s more important to look at the likely result of that debt. Basically it comes down to one question:

Do you expect to get more value out of the debt than you put into it?

If the answer is yes, then it’s probably a “good debt”. If the answer is no, then it’s probably a “bad debt”.

It’s a simple question, but it’s not always easy to figure out. After all, “value” doesn’t have to just mean money. It can also include things like happiness, or maybe even time.

If taking on a particular debt results in you having less money but more happiness, was it a good decision? Maybe, maybe not. But it’s definitely a fair question.

What are some examples of “good debt”?

Okay, so if our base question is “do you expect to get more value out of the debt than you put into it?”, what happens when we look at a few real world examples?

Some scenarios are pretty easy to figure out. I’m not going to buy a TV with my credit card unless I know I have the cash available to pay that credit card off in full at the end of the month. That TV will lose most of its value as soon as I plug it in, and the interest I pay on the credit card balance would only make that loss bigger. By my definition this is clearly a “bad debt” and something I want to avoid.

But there are some other scenarios where taking on debt could lead to some really positive outcomes.

Student loans

Student loans are a good example. While there are plenty of ways to get an education that don’t cost an arm and a leg, is it possible that taking out some student loans could be a good decision in the right situation?

Of course!

It may be that I want to pursue a very specific career, either because it would lead to higher pay or because I simply love the work. If the only way to pursue that career is to get a specific degree, and if I don’t have the cash to pay for that degree, it really might be a good decision to take on the debt needed to pay for it.

Here, the long-term return could be in dollars (increased income), happiness (enjoying the job) or both. Either one may well be worth the cost of the loan.

Buying a house

I’ve rented ever since I finished college. I’ve never owned a home. And I’ve written before about why I think that’s been the right decision for us so far.

And while I definitely do think that renting has been right for us, the truth is that there’s a part of me that’s simply nervous about taking on the huge amount of debt that a mortgage represents. There’s an emotional component to my decision-making process that’s probably clouding my judgment at least a little bit.

Buying a house is nowhere near the slam-dunk good investment that people once thought it to be. In fact, in many cases it’s actually a pretty poor investment.

But it’s also true that buying a house can be a good long-term financial decision. It can also be a decision that creates happiness in the form of having a place to call “home”, raise a family, and make your own. I certainly don’t want to deprive my family of those potential benefits just because I have an emotional reaction to taking on the debt.

Starting a business

My wife and I are both self-employed. She runs a counseling practice and I run a financial planning practice.

So far we’ve been able to fund them with a combination of savings and the income they’re earning. But what if we got to a spot down the line where our savings were running low and the income they earned wasn’t quite enough? At that point we might face a tough decision:

1. Either shut down one or both practices and find a traditional job, or
2. Take out a loan that buys us some time to keep building our businesses.

I don’t know which one would be best for our family. But I do know that avoiding Option #2 out of fear alone would be doing both of us a disservice.

Maybe that debt would make our situation even worse. But maybe it would provide the bridge we needed to really get our businesses going and create the life we truly want. We would only be able to figure that out if we looked at the situation objectively, without fear.

Practice caution, not fear

No decision to take on debt should be made lightly. Too much debt can not only make it difficult to reach your long-term goals, but it can cause tension in relationships and add stress to your life.

So caution is good. But when caution turns to fear, it closes off opportunities that actually might be beneficial.

What I would like to be better at going forward is looking at the decision from both sides and understanding the trade-offs. Because there are no absolute truths. There are some cases where debt can help you can get ahead quicker or save money in the long run. And there are many others where debt will simply drain your resources.

But it all comes back to our goals. Debt isn’t really “good” or “bad”. It’s just better or worse for our specific goals.

If we can keep that in mind, I think we can make better, less emotional, decisions.