Stop it right now. Debt isn’t always Bad!

Posted November 12th, 2013 at 1:04 pm by Matt

As a society we seem to have developed a hatred for debt since the economy nearly suffocated in 2008. Now clearly, when you have a choice between using debt and not using debt, the choice is probably clear. And debt can be bad when abused, but it’s not absolutely bad. Milk is good for your bones, but try to drink a gallon at once and see what happens. It drives me crazy that so many perspectives today are a reaction to the extreme case and not the normal case. I think debt is another victim of this type of thinking.

I hear a lot about debt in terms of federal government vs. household lately. I think most of this stems from the Libertarian/Tea Party movement – though I’m sure some of it has always been around. From the government angle we often hear from the right that we ought to stop spending money (the pro-austerity perspective), stop increasing national debt, and often the federal budget is likened to a household budget – with a credit card playing the role of our trillions of debt.

Setting aside from the horrible analogy being made between your household budget and a nation’s economy, I do understand the thought process here: we are spending a lot of money, we don’t have enough coming in, so we have to fill the gap with debt, and we should stop doing that.

But perhaps it’s not that simple. Perhaps debt isn’t just bad. After all – a common differentiator between good debt and bad debt is the terms. So, what terms are we borrowing this money against? To use the (poor) household analogy: if you have to fix your water heater in January in New England – it probably doesn’t matter much where the money comes from – you have to do it and as soon as possible. Assuming you don’t have thousands in your mattress, you might compare borrowing from a home equity line of credit versus a credit card. There will probably be a big difference in terms of total cost because of the terms, right? This debt is “bad” either way, and you might wish you didn’t have to do it, but you had to.

Okay, so now in government terms: our water heater might be Medicare or defense spending (or anything, the government is still shut down as I write this). We have to spend this money – so the question is where is it going to come from?

Herein lies a household/government difference. A treasury note from the US Government (at least before the shutdown in October of 2013 – hopefully after too!) has for a long time been considered one of the safest investments out there (it’s often the basis for the risk free rate, for example). As I write this a yield on a 10 year treasury is 2.70% and a 30-year is 3.74%. Now, depending on what inflation looks like over these periods, this money could be effectively free for the government to borrow. Now it’s not all free and this doesn’t mean (in typical extreme-case form) that we can start borrowing all sorts of money and it will always be free – but these are good terms! So, as we’re discussing spending – looking at things through this lens really changes things. If your household, for example, had investors clamoring to give it money that you can repay at negative yields compared to inflation, you might learn to love your shiny new water heater a little bit more.

So stop it with this government debt is always bad stuff. It isn’t always bad. Just because it can be bad doesn’t mean you can’t ever use it.

But setting the government, and the shiny water heater, let’s get back to the household.

I often hear that debt is bad for people personally too. This sort of talk is often delivered through the hyperpolarized, extreme lens that I hate so much. And, this is dumb. It’s dumb because it’s bad advice. The message, “Debt is bad,” is delivered as a path for living your life rather than a goal. Living debt free can be a good goal, but saying debt is bad and you should not use it will be stifling. Young adults roughly my age are hearing his all the time – and many getting started with careers might heed this advice to literally – and that might be really bad.

I saw this article from Mike Rowe’s website, Profoundly Disconnected, that talks about “The S.W.E.A.T. Pledge.” It says a mix of things, but what bothers me is #5: “I deplore debt, and do all I can to avoid it. I would rather live in a tent and eat beans than borrow money to pay for a lifestyle I can’t afford.”

Remember that extreme-case bullshit? Danger Will Robinson, danger! It’s back.

Deplore? Eat beans? Some strong language! Why can’t this say “I’m scared of debt and don’t want the bad kind, but sometimes I’ll use it smartly so I live a better life.” That’s effectively saying the same thing in terms of credit cards and other bad debt. But it’s a little less fire and brimstone.

By the way – I love Mike Rowe – not only his show, Dirty Jobs, but also some of his other stuff on ProfoundlyDisconnected.com. He is exactly right on the skills gap (I’ve been saying that in my world of coding for years! If you want a job for $100k+ – try to learn to code. It’s not for everyone, but there is a big, unmet need for good coders out there, right now!) He is also exactly right on trillions of dollars in student loan debt. (That’s the next bubble BTW – read about academic inflation and the student loan bubble). But this “deplore debt” business – come on, stop it. Some clarity is needed.

You only get one shot at living your life – there are no do-overs (note: make an app for that) – and debt will probably have its place in it.

I do not love debt, but I use it. Much like a business that leverages debt to meet its goals. This can work in a household too.

My wife and I bought our first home in 2011 – it was a real fixer upper. We’ve redone almost the entire house and we have put a ton of money into it. Two of my favorite uses of debt were for the house.

The first was the mortgage. We did a 30 year, fixed rate mortgage at 4 point something percent. This mortgage allowed us to buy a home and start a family a decade sooner that if we had saved for 50%+ of the house in cash. For me, a super use of debt.

The second is our Home Depot Credit Card. We have put a lot of money on that card over two years as we have remodeled our home. Every penny has been 0% interest rate. Sometimes for 12 months, sometimes for 24 months. It’s free money. (Note: the catch with these is you can never pay this late – so schedule payments and pay it off a month early to be safe). Seriously though, financially it is the exact same as saving for 12 or 24 months and then purchasing – except we get to finish the project a year or two earlier. For me, another smart use of debt.

I could go on and on here – traveling, cars, et cetera. (Yes, my wife and I traveled via some debt – granted it was a bit unplanned – but I’d do it again in a heartbeat.)

Debt has given me things I want in my life – my nice home, remodeled the way we wanted it, amazing travel experiences, shiny cars – because I’ve been smart about it.

So, we need to tone down the messaging here. Debt isn’t the root of all evil. Some people stupidly took out 110% mortgages on homes they could never afford pre-2008. That might happen again. Some people ruin their lives (and sometimes their families lives) with bad debt…stupidly. But none of this means we should all avoid debt or deplore it! So dramatic! Stop it.

The idea that you should not use debt and live debt free is dumb. It’s should be a goal, absolutely, but not a guiding principal as you live and work towards your goals.

Disclaimers:

The issue of credit comes into play here – and not everybody has access to credit – which is another problem (I suggest helping via Kiva, I’m a big fan). This is an additional problem and I’ll admit I am taking good credit as an assumption as I write this…

Also, I might not be as financially conservative in my household as some – and perhaps therein lies some of my frustration. I would never save 50% or more for a down-payment on a house if it meant living with parents for a decade so I could avoid a larger mortgage. Cultural differences certainly come into play too, for sure. But for me, that’d be crazy.