Over the last few years I’ve spent a lot of time pondering debt and whether there can ever really truly be a good kind of debt. Oh, I know a lot of people refer to things like student loans and mortgages as “good” debt, but how good is it really? I mean, wouldn’t it be better if you had no debt at all? It’s not like when you tell someone you have student loan debt they ever say, “Good for you!” It’s really not that good a thing unless you start comparing it to other kinds of debt.
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Yes, student loan debt looks pretty darn good next to credit card debt I guess- well, unless you take into the account the fact that credit card debt is often discharged in bankruptcy- whereas student loan debt is almost NEVER dischargeable in bankruptcy.
My point is this: if any type of debt were all that good, wouldn’t we all want some? But the fact of the matter is that most of us (and in particular most readers of this blog) are avid debt haters and are out to annihilate debt at all costs, if you haven’t already.
Debt is Risk
Why is it that we all hate debt so much? I guess that most folks would say things like they hate paying interest, they hate owing somebody something, or they just hate seeing money flow like water out of their checking account each month to go toward things or experiences they’ve purchased in the past. But I would say that, at its core, the reason we all SHOULD hate debt so much is because debt symbolizes risk.
What the heck does that mean? Well, take Mr. CMF and me. We have kind of a lot of student loan debt hanging around. I know a lot of “experts” would consider this to be good debt. However, we actually have a six figure amount of student loan debt between the two of us. Yeah. A LOT.
Right now that student loan debt represents risk to us, because if one or both of us were to lose our jobs for whatever reason (especially if it were Mr. CMF, since right now he makes a lot more than I do), we would be put in a risky situation.
The risk arises because our lenders do not give a rip about whether we are employed or not. They want to see us making payments every month no matter what, and those payments would still be due if we lost our jobs. Yes, there are things like hardship forbearance and things like that, but for the sake of this conversation we’ll pretend those aren’t options- after all, we want to get rid of debt, not help it hang around longer!
But that’s just it- if we lost our jobs we might be forced into a situation where we HAD to try to get forbearance on our loans if we could not pay them- which would put us at risk of having our payment term stretched out even longer and thus having to pay more interest. Now, luckily I’ve been a good little PF blogger and we’ve saved up a solid emergency fund- but if we could not find jobs again for whatever reason before we ran through it we could potentially face a situation like that- IF we let our student loans continue to hang around.
Is There Such a Thing as “Good” Debt?
Take the other kind of debt that many “experts” will tout as good debt- mortgages. Millions of us hold mortgages, but how many of us have stopped to think about what would really happen if we could not pay those mortgages?
Unfortunately far too many people found this out during the recent real estate crisis in the U.S. when they stopped paying mortgage payments- and the banks came after them and seized their homes in many cases. Do you know where your family would live if you couldn’t make your mortgage payment and the bank seized your home? Although this is obviously an extreme situation, it very neatly encapsulates why it is that debt is so risky.
Sadly, at least for Mr. CMF and me, we got ourselves into a lot of debt in the form of student loans when we were in our 20s and still pretty naïve about money. We didn’t know a lot financially-speaking then and because of that we made some decisions that we now regret, such as living too high on student loans when we were in grad school. And actually for a long time after grad school- for about five years, to be exact- we didn’t bother paying any extra on our student loans because we had drunk the “it’s good debt” Kool-aid and we figured we could make a better return on our money if we invested.
Now, this may be true- our student loans are currently locked at 2.5% and 3.5%- but this doesn’t erase the fact that it’s still a six figure debt and it represents a large risk to us were we to ever lose our jobs or become unable to work. We did in fact invest our butts off over the last five years- and we now have a nice nest egg to show for it- but we sure have a large student loan debt mountain to climb. I guess you could say that we are the epitome of well-educated debtors.
And Back to Risk
It all comes back to the fact that when you take on a debt, any debt, you are assuming the risk for that money and you are agreeing to pay it back. Now certainly in the case of a house or a car you may choose to sell it prior to paying it off and then you would not owe those payments anymore- but for the life of the loan you are agreeing to make those payments every month when you sign on the dotted line to take out a loan.
But What’s the Other Risk of Debt?
What? There’s more risk to debt? Isn’t it already bad enough? Yes, there is actually another kind of risk to debt. The other risk is what I’ll call opportunity cost.
Say Mr. CMF and I DON’T get laid off or get laid up in a car accident. What if we just hate our jobs and want to quit? The risk that we take by keeping our debt around is that we need to maintain jobs that will allow us to make those payments every month. But what if I decide that’s my life’s passion is to become a freelance documentary filmmaker and I want to ship off to sub-Saharan Africa for a year? If I still have student loans, mortgages, and other debts hanging around I may not want to come back to the US, because if I skip out on those payments for a year my lenders are most definitely going to notice!
Here’s the big take-home point here: Having your debt continue to hang around could COST you the opportunity to follow your dreams; or at least, it could certainly slow down your progress.
The Problem the Joneses Too Often Make
The problem that I think many people (at least in the US where commercials tout the cost of pretty much any consumer product in terms of its “low monthly payments”) make is that they allow the payment mentality to win out and assume that because they often have that amount within their monthly spend that they can afford the item.
I see this a lot with individuals that I work with. They are making payments on houses, usually two cars, and maybe other luxuries such as a boat, private school for the kids, etc. What no one stops to think about is the fact that they are playing a game of Russian roulette with their finances- and they are literally only one serious car accident, one debilitating illness, one layoff, or one lawsuit away from losing it all. That’s RISK.
So What’s a Girl (or Guy) to Do?
The answer is simple really: reduce your debt if you want to reduce your risk. And, almost more important- stop taking on new debt!
Suggested Reading: There are lots of great books out there about getting out of debt! One that I particularly like is Debt-Free: 9 Step System to Get Out of Debt Fast and Have Financial Freedom: The Quickest Way to Get Out of Debt Forever.
Is your debt holding you back from doing things that you want to do with your life? Or has it held you back in the past? Please feel free to share in the comment section!
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