Friday, October 29, 2010

Good Riddance to “Good Debt”

If you sit through a couple learning seminars with various financial experts you might hear a couple of them say that there is such a thing as “Good Debt”. You will also probably hear these same speakers say that real estate debt and student loans are ok to keep around because the interest is tax deductable and you have an asset that is appreciating.

For most of us these types of debt are almost inevitable. It sure would be nice to pay for a house in cash or to get through college without a single loan but that is pretty rare. I am not saying it is impossible, its not! However, I do think it is a bit backwards to call this debt “good.”

Myth: Real estate debt is good because it is tax deductable.

taxes 2The government saw fit to let you write off the interest expense on the mortgage you took out to buy your home. Did you know that they also used to let you deduct the interest expense on your credit cards? Gosh we should probably classify credit cards as good debt then too.

Here is my opinion – which would you rather? Reduce your tax bill because you spent a bunch of money last year or get to keep that money and invest in something that increases your income such as tax free municipal bonds. If you do the math, I think you will find that the increased income is more beneficial than the decreased tax bill.

Myth: Student loans are a necessity, the only way to pay for college to be independently wealthy or be broke as a joke.

The truth is that college can be paid for with diligent saving, scholarships, grants, and part time jobs. But let’s say that your parent just weren’t able to save for your college. There is still no reason to let your loans hang around for 20 years or more. You lived like a college student for 4 years, why not live like one for a few more after you get your first real job?

One of my good friends graduated from a private college with debt that could go toe-to-toe with the best of them. After continuing to live simply and sticking to a budget he has been able to pay off more than half of the outstanding balance in just two years. That’s no small feat! Now he is truly crushing the remainder and can even feel good about applying to graduate schools. Good work buddy!

What it really comes down to is this. How fast to you want to reach the pinnacle of the financial pyramid from last week. It’s all about financial independence. If you don’t owe money to anyone you can do… well, pretty much anything you want. Good debt, bad debt, toxic debt – call it what you want but let's be real. Imagine a month where you owed money to no one. Sounds pretty good to me.

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