Tuesday, September 1, 2009

Good debt vs. Bad debt (Does good debt exist?)

A few years back two nameless friends were contemplating either to buy a condo or a flat screen TV. The housing supporter suggested buying a condo instead of renting. Other friend, instead wanted to get a flat screen TV to watch Sunday football at home (high definition rocks). The housing friend explained that there are “good debts” and “bad debts”. Even CNNMoney’s Money 101 Lesson (recommended) has a chapter on “good debt” and “bad debt”.CNN Monney defines good debt as anything “you need but can't afford to pay for up front without wiping out cash reserves or liquidating all your investments.” and bad debt as something “you don't need and can't afford.”
  
Three years later and after collapse of housing bubble, the friend who bought the house is in substantial debt and the friend who bought reasonable 32 inch LCD TV has saved more than $1000 dollar in bar tab.
   
So there is no good debt or bad debt. All debt are potentially bad and all investments are potentially rewarding (note: with risk).
  
Thus, I would redefine the two categories into “investment debt” and “avoidable debt”. The “investment debt” are unavoidable within pragmatic terms, taken after exhausting all the reasonable alternatives and after thorough risk assessment. This “investment debt” are investment on higher education, reasonable house for raising a family, loan for reliable and affordable vehicles to commute to work (in lack of good public transportation) etc.  And there are those “avoidable debts” which are incurred for reasons that can be avoided, or have practical alternatives or which can be abstained from. This “avoidable debt” include; credit card debt for expensive vacation, loan for designer wear and layaway for the flat screen 60 inch LED TV (you can really live with 32 inch LCD!). 

1 comment:

  1. I wanted to say that I enjoyed skimming your blog. It's somewhat what I'm trying to do on my own blog. I look forward to hearing more about your efforts to get out of debt!

    ReplyDelete