December 16, 2013

Good Debt: Is There Such A Thing?


Debt is powerful. In our culture it is a fact of life and part of anyone's satisfying retirement. A recent study in the Wall Street Journal shows that 32% of all households with someone 65-74 years old are carrying credit card debt, while 41% have a housing debt. In fact, the median value of that mortgage debt is $70,000 based on the latest figures available. 

We are familiar with bad debt: that is debt that drains our resources and puts a stable financial situation at risk. Examples? Credit card debt that rolls over month-to-month. Some of the most expensive debt one can accumulate, using these cards as open lines of credit have landed many people in serious hot water. The latest figures show an average household credit card debt of over $15,000.

Taking out a mortgage that is too big for you to comfortably handle, or using your home's equity to pay for things like vacations, new cars, or a room full of furniture can put the place you live at risk. We have just experienced a serious retrenchment of housing prices and stories of way too many folks upside down in their mortgage situation or foreclosed on when a job was lost and the monthly payment could not be made.

Bad debt is easy to understand.


So, is there ever such a thing as good debt? Yes, I think there is. Consider these situations:

1) Buying a house. Based on what I just wrote above, how can this be?  If equity buildup isn't treated like a piggy bank, one plans on staying in a home for several years, and it provides a safe and pleasant environment, then mortgage is good debt if the monthly payments won't stretch the budget too far. This may be less of a dream today than it once was, but owning one's own home remains the goal of many.

2) Financing post high school education. Student loan debt averages over $31,000. But, it has become clear that a solid education is a requirement for any decent chance of success in today's world. Importantly that can mean college or a technical school in a brick and mortar environment or on-line. What has to be carefully considered is whether the dream of an Ivy League school is viable and even necessary. For most young people (and their parents), a state university, community college, or well-respected technical school will accomplish the goal of becoming a valuable employee for someone. As long as the level of student debt isn't too far out of line with the expected return on the educational investment, debt for some form of advanced education is good debt.

For retirees who find they either must, or want to go back to school to complete an unfinished degree, learn a new skill, or train for a new job, student debt can be good.

3)  Covering unexpected medical costs. Even a few days in a hospital for an emergency or simple operation can cost tens of thousands of dollars. What insurance doesn't cover, you must. Borrowing money to pay to help yourself or someone you love in such a situation is a type of debt most of us would take on in a heartbeat (pun intended). Human life trumps debt. This is good debt only because it considers a human life to be priceless.


In these instances borrowed money is used to pay for something that is likely to appreciate in value over time or increase your income. Bad debt often is used to purchase something that does depreciate or have no value once it is over, like a one time trip to Bora Bora or 90 inch TV. Vacations and a new TV are not bad, in fact a trip to the South Pacific sounds pretty good. But, it is not a good idea to borrow money to pay for it.

Bad debt or good debt? A debt is really neutral. It is how you use it, what risks you take to acquire and maintain it, and what your ultimate plans for that debt are.




20 comments:

  1. One other comment on debt...sometimes an appliance, like a refrigerator, will break down & isn't repairable. IF credit is necessary to purchase a new one, shopping around for a 12 month same-as-cash arrangement is another way to maximize finances.

    Again, from my perspective, this does NOT mean to finance a trip to Bora Bora on a 12 month same-as-cash; this suggestion is only for something like a refrigerator that is difficult to live without.

    Getting deeply in debt would seem to me to put a huge crimp in a satisfying retirement.

    pam

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    1. Good suggestion, Pam. A refrigerator is one of those things that really can't wait to be replaced, but as you note, shopping around is important to secure the best deal.

      $15,000 of credit card debt (the average in this country) is quite a hole to climb out of.

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  2. I'm sorry I paid cash for my house. I could have gotten a mortgage even during the recession and that money put in the stock market would have grown--I'm a good stock picker.

    I bought a very souped up iMac laptop and put it on a no interest credit card. Had 18 months to pay it but my aversion to debt made me pay it in six months.

    I believe Best Buy offered me a no interest credit card. did think of buying stainless fridge, dishwasher and stove but kept my faux stainless! I pay my credit card bill the day it comes online as I use them instead of cash for cash back, miles and very easy record keeping.

    The thought of debt makes me sick to my stomach and I kind of wish I could live with some debt

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    1. If I had to choose between living with some debt and avoiding all debt like you, I'd make your choice. Some debt can be either good or necessary, but not if the thought of it upsets you.

      I paid cash for my last house. I wanted to enter retirement without the fear of losing my house for some reason. As the mortgage debacle of 208-2009 showed, even well intentioned people got caught in the mess and lost everything.

      I don't regret making that choice even though several folks urged me to do what you said: get a mortgage, take the deduction, and use the extra cash for investing. Just after the dot.com stock market bust I was in no mood to get into that arena.

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    2. I paid cash for my last (present) house, too, Bob. No mortgage means a MUCH lower annual baseline budget and that has many positive cash flow and mental effects for me. But I do see the sense in constructive debt (pun intended) -- like the $9800 new roof I am financing at 0% interest on said paid-for house! :O

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  3. Bob,
    One thing to add about college debt. I see too many people who are not employable seek and finance a college education. They have the ability to sit in a classroom, take test and pass. However, when they go to get a job, the person is not personally marketable. I see Business majors who end up being a receptionist. I see Engineers as comic book store clerks because they too techie. I think education is great and deeply needed in this country. However, just because it is a great thing doesn't mean everyone should do it. It's hard to tell Mr and Mrs Smith that little Johnny is smart but college may not be the best avenue for him. I know personally degree'd Mechanical Engineers that don't know how to use a drill.
    What I am trying to say - make sure the degree sought matches both your ability and your desire.

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    1. Absolutely. Not everyone should get a traditional degree. In fact, with the expenses rising so rapidly, college is becoming more and more a rich person's dream.

      Community colleges, technical or specialty schools are a much better choice for lots of folks depending on their talents and employment hopes. On line schools are a legitimate choice, too.

      Having a $100,000 degree with no prospects for work in your chosen field is not a pretty picture.

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  4. Someone once told me, "They aren't making any more land. Invest in Real Estate!" Very good advice, for people who aren't all that savvy about managing money. We've made some shrewd RE investments over the years and it has saved our butt more than once.
    b

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    1. Betty and I owned four rental homes in the early 2000s and got out just in time. I learned a lot as a landlord....I learned I didn't want to be a landlord. But, the real estate park worked out just fine.

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    2. Oh, we know about being a landlord. It's been a good experience, for the most part, in the city. But, we learned quickly it wasn't any fun at the beach. If the renters know the owners live upstairs they are always bugging you!
      "It's raining...what should we do today?" Was the sort of thing I heard way too often. So we condo'd the place and sold the 1st fl. for almost as much as we'd paid for the whole house 18 mo. prior. That was the best deal ever!
      b

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  5. This is not so much about debt as it is about home ownership. We moved many times in our lives and always bought fairly new homes so we never had a lot of maintenance bills. Now we are retired and no longer nomads. We have no mortgage but we have been in this house for almost 20 years and I feel like we are replacing it piece by piece. It is still better than a mortgage, but I am amazed at how expensive maintaining an older home gets to be. Something to factor into the retirement budget for sure.

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    1. Our home is 30 years old so I can understand the piece by piece replacement.

      For our next home I am giving serious thought to renting an apartment. No maintenance, no repairs, no landscaping, no worry, and no tie up of money from the sale of this house. I will need that for a buy in fee for a CCR at some point.

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    2. What is a CCR?

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    3. My confusing shorthand for Continuing Care Retirement - a facility that has Independent living, assisted living, and a nursing home. The "buy in" for such a place can easily top $200,000.

      Sorry, I should have spelled it out!

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  6. I think of debt like medicine -- take what you need, when you need it, but no more. That being said, I couldn't pass up the 0.9% financing for the last car I bought.

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    1. Your medicine and debt analogy is excellent. Take it when you need it but don't overdose.

      With a 0.9% financing you could take the cash you would have used to buy the car, keep it invested, and even in today's low rate environment easily beaten 0.9% and come out ahead!

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  7. Interesting reading the comments here. I suspect most on this blog are either enjoying a good retirement, or could be enjoying one if they pull the plug on that work thing. It also appears that most/all have a healthy aversion to debt, something which I have also had all my life. At this point Deb and I have absolutely no debt (paid the house off after six months), pay the credit cards in full each billing cycle, pay cash for any vehicles we purchase (and hold them for awhile, something I also suspect your readers follow), and in general live within our means.

    Nothing will imperil a satisfying retirement more than carrying debt into that phase of your life, or rather debt that is difficult to pay off. I am alarmed at the increasing % of retirees carrying high mortgages, financing a larger lifestyle than they can afford, and so on. Whether due to the easy credit policies that the country has been following, or the fact that bad decisions oftentimes made by individuals have been credited/demonized onto the institutions that lent them the $, or some perverse notion that they are "entitled" to a lifestyle they cannot afford, the older population of this country seem to be getting themselves into tougher and tougher economic positions. Your points need to be impressed upon the country more than some touchy, feely, "it's not my fault" mantra. Maybe collectively we can help by living our financials as we have, and express ourselves to others positively in this regard.

    Merry Christmas and Happy Holidays to you and Betty, and all your readers.

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    1. For those who have control over such matters, to live a lifestyle that fits one's financial wherewithal is the only sensible choice. I know some retirees take the attitude that they can spend more while we still young enough and active enough to enjoy such things.

      Unfortunately, that mindset insists that expenses will go down as one becomes less active and more homebound, completely ignoring the potentially huge medical expenses that come with such a decline.

      I am pretty sure the readers of this blog are above average in their understanding of decisions and the consequences of those decisions as we age. They are certainly well above average for most blogs in their willingness to engage in meaningful, intelligent, and helpful discussions.

      Best you and Deb.

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  8. My wife and I are not financial geniuses, but two of the smartest money moves we made were to pay off our mortgage during the first year of my retirement and to pay the full balance of our credit cards on a monthly basis to avoid the usurious interest charges that card companies charge. A third smart thing was to buy our latest car for cash. These moves make us practically debt-free in our retirement--at least for now.

    The financial picture is not so bright for our 32-year-old daughter, who is carrying a large student loan debt (around $40K). Although she invested in her education--what you call good debt--her college degrees did not lead to a good job. After being unemployed for more than a year, she moved back in with us, unable to afford to rent an apartment. Thankfully, she now has a full-time job, but her pay is so low that she has not been able to find an apartment she can afford. She did not need a college degree to get her current job, but she still must make monthly payments on her "good debt." The economic hollowing-out of the middle class that we are seeing in this country makes me seriously question whether a college degree is still the ticket it once was to higher earnings. While it still may be true for a privileged few at the top, the promise of a college education has proved empty for many.

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    1. College costs are increasing faster than inflation and even health care costs. Many schools are placing themselves out of reach of most. But, as the post notes, there are alternatives to a regular college: 1 or 2 year technical courses and community colleges that may be just to ticket for many.

      The one undeniable fact is that without some training or education past high school employment options are extremely limited. One exception: specialized craft fields like plumbing or electrical contracting. But, even then some sort of certification and working under an experienced person would be required.

      What must be weighed is the likelihood that the cost of whatever continuing education is chosen has decent odds of paying off. Obviously, as your daughter's case proves, even the best laid plans can't guarantee success.

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