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Certaindebt “financial advisors” – who are little more than media-made celebrities – declare that debt is bad and must be purged.  They have names that rhyme with Rave Damsey, Floozie Orsman, and Spark Coward.

There is partial truth in their words – but the whole truth is – not all debt is equal.

Debt is a commitment of future income for something we want today.  The problem is that we’re not promised income tomorrow (or tomorrow itself for that matter).  So – if the “thing” we acquire with debt either declines in value or is consumed – we’ve made a repayment promise we might not be able to keep – and that’s bad.

But when debt is used to acquire things that have a reasonable chance of holding their value – or growing in value – repayment doesn’t have to rely on future income alone – we can always sell the “thing” in a pinch to satisfy the debt.

Let’s look at a few examples:

  • Debt to buy a houseGood debt – because the house is not consumed, is unlikely to lose value, and could be sold to satisfy the debt if need be.
  • Debt to take a vacationBad debt – the vacation is “consumed” and there’s nothing to repay the debt other than the promise of future income.
  • Debt to make an investmentA little tougher – because we have to assess the safety of the investment; and the likelihood of it growing in value.  Safe, growth-oriented investments may be comfortably financed with debt – risky investments should not.
  • Debt to get an education (here comes the controversy).  Bad debt.  Education is consumed (by the student) for the express purpose of securing a future income that doesn’t even exist at the time debt is taken on.

Bottom line: Assess debt for what it is.  Borrow sparingly.  Borrow only when you know – with reasonable certainty – that the debt will acquire something that won’t be consumed or lose value.