Wednesday, June 4, 2014

Good Debt versus Bad Debt

I must have been born hating debt. I cannot imagine anything that is more depressing and limiting with the exception of serious health issues.

I started using a credit card back in 1990 and I have never paid a single penny as interest. I have always thought of credit cards as a means of payment not as a source of loan. Credit card debt is a very very very bad form of debt.

Student loans are not a part of life in my country but I understand it may be a necessary evil for Americans. The part that I do not understand is the expectation of income versus the amount of debt incurred. If you are studying to become something that will not enable you to pull lots of money, getting into debt for education does not make sense to me. Besides, if I am not wrong, going to state schools are less expensive in the US.

Would I borrow money to buy a car? Ummmm... No! I never did that but then again, I was lucky to drive company cars most of my career, like 16 years out of 24. I bought 6 cars in my life, 3 used, 3 brand new all with cold, hard cash. I have a 4 year old car which I am hoping to replace in 2018 so, part of my current savings should be allocated to that. A car loan may be necessary for some but not for me. A car loan may be a good debt for some people. For most people I think it is bad debt.

How about a home? Well, that is a big ticket item and it doesn't make sense to wait many years for home ownership. However, I would not be comfortable paying just 25% down even for a home. I once did that but, I had a property for sale and had a very solid full-time job. I closed the bank loan in less than a year selling my other property. If I were in my early thirties and if I had a solid job, would I take along-term loan like a 20 year mortgage? May be, I am not sure. Still that is a very long time for things going wrong.

My thinking is probably due to being single. If I had a spouse, if we could live comfortable on one income, I might be willing to take more risks.

I consider all debts bad with the exception of a home loan. It is a matter of postponing wants. Not an easy task with all sorts of things that are shiny and new around us, with people who seem to have everything but, living within ones means is the key.

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