What is debt?

Debt: What Do You Think?

Knives are a tool. Used properly, they can provide great benefits for the user. However, there’s another side to that coin; knives, if used without a little bit of restraint and common sense, can really hurt somebody. Like, kill them until they’re dead. Debt is the same way.

Just like with guns, there are people who believe in it and people who believe it’s the worst thing to ever be brought to this Earth. With such a controversy, in order to have an informed opinion, we have to examine both sides and the points they make.

For example, Dave Ramsey likes to say 100% of bankruptcies involve debt. However, some people think debt is a necessary tool to get ahead in life.

The dress, Yanny or Laurel, and the shoe.

In essence, debt is a hotly debated topic among personal finance nerds. It’s basically the Yanny or Laurel of the money world. (It could also be the dress or the shoes, depending on when you were born and what you remember.)

Debt Should Be Avoided At All Costs

This camp of people believe that there is no such thing as good debt. They avoid debt like the plague and encourage others to do the same. Many of these people almost feel like outsiders, because so many other people are using debt to get what these people pay cash for.

This group of people makes a very valid point, especially with bankruptcy rates being as high as they are, as well as the whole student loan crisis you keep hearing about

Total consumer debt in America

Thanks, Marketwatch!

Compound Interest Works Two Ways
Compound interest, when it works for you, is the 8th wonder of the world, according to Albert Einstein. However, that all depends on who it’s working for.

You can invest your money at 8%-12%, but you can borrow money at rates that can vary from 0% to exorbitant amounts. It’s honestly ridiculous!

Historic credit card rates.

Thanks to GoBankingRates!

As you can see in the chart, credit card interest rates have been trending upward since 2014. It may not look like a lot, but 14% interest on debt is outrageous!

Instead of earning that interest for yourself, you’re paying it, and 14% adds up really fast if you’re only paying the minimums on your card. Yikes! Avoid the bank account leeches (AKA credit card balances) at all costs!

Don’t Finance Anything

This means literally anything. Not a car, not an education, not even your dinner. The people that are practically allergic to debt are strict cash-only people. They have good reason not to borrow on purchases, though.

Nice cars are bank account leeches.

Cars are a big-ticket item that people just love to take out loans for. The problem with car loans is that the value of the car drops much, much faster than the value of the loan.

Student loans are also a huge problem in America today. According to Forbes, 44 million people owe $1.5 trillion in student loans! Yikes! The average student in the class of 2016 has almost $40,000 in debt!

This kind of debt is ridiculous! It could take you 10 years or longer to pay it off if you only pay the minimums. Do you really want to have your income go to the student loan company, or would you rather have that money for yourself?

Payday Loans and Friendly Loans

Payday loans have got to be the biggest ripoff available to America today. If you actually do the math for the annual interest rate on a payday loan, it ranges from 390% to 780% or more! Can you believe that people fall for this?

A $30 fee to borrow $100 for two weeks is ridiculous! I know we’re examining two different sides here, but I would definitely avoid payday loans like the plague! Avoid them like that weird hallway that always smells bad! I mean it!

A group of friends
Wouldn’t it suck to lose your friends over money?

Friendly loans are also a super bad idea, because they can ruin your relationship with someone. If your friend borrows $50 from you until they get paid again, and then suddenly stop talking to you, you lose twice! Not only did you lose $50, but you also lost a friend! Doesn’t that suck?

This doesn’t just apply to friends, either. If you’re always borrowing money from your family, they start to gossip about you, stop talking to you, or practically excommunicate you from the family. This gets especially bad when you don’t pay them back.

Don’t lose your friends or wreck your relationship with your family! Just don’t do friendly loans!

There Is Such A Thing As Good Debt

Wait a minute! What if you know how to do things in moderation? What if you’re not irresponsible? What if you are super money savvy? You could totally use debt as a tool and reap immense benefits.

Mortgages

You’ve probably heard of a mortgage before. Mortgages are loans used to buy houses. If you’re super responsible, you’re ready to buy a house, and you have a steady job, a mortgage could be a great tool for you.

A lot of people leverage mortgages to own a home and still invest their money. If you don’t want to tie up hundreds of thousands of dollars in a home, then a mortgage could be a smart decision.

Some people have an investment fund that is technically supposed to be for paying off the mortgage when they retire, but that fund is liquid. Should there be an emergency, those people can pull their money out of the investment account without having to worry about using the equity in their home as a source of cash.

HELOCs

Some people go ahead and pay off their house. These ultra-responsible, ultra-savvy people are using the equity in their homes (the value of their house) as collateral for something called a Home Equity Line of Credit.

They use this line of credit as a fund for emergencies, because they know they can pay off any balances they accrue. More importantly, they understand the risks of not paying. They’re responsible, so they bank won’t foreclose on their house.

Debt in Moderation

Some debt can be good in moderation. For example, student loans can be a good investment in your future if you’re responsible about them.

If you only borrow a small amount of money for a marketable degree, then you could be out of student loan debt in no time, as well as have an awesome degree that will help you make a lot of money over the course of your life.

In addition to student loans, credit cards can be awesome if you use them responsibly. If you pay them off every month, you can get super cool rewards like cash back or points. Those points can be redeemed for things like airline flights, hotel nights, or other cool stuff.

What Do You Think?

The financial world is divided sharply among those who believe debt is the worst thing to ever happen to people, and those who use debt as a tool to further their own financial positions.

The real question, though, is what do you think? No matter which side you choose, you will always have people in your corner. Whatever you think, be responsible with your decision.

If you’d like to watch a video about debt, click here!

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