Thursday, October 4, 2012

Does Good Debt Exist?

Good debt does still exist. Home debt, if you are not dramatically underwater is still good debt. Please remember that the majority of home owners have seen some degradation of their equity, but most homeowners are not underwater. The generally accepted number is somewhere between 20-25% of all homeowners have a home that is underwater. Most of these were either purchased or refinanced during the recent boom in prices, especially 2005 to 2008. It is a simple truth that 75% or more of all U.S. homeowners are not underwater. Homes purchased today with a reasonable downpayment of 20% or more may have some stagnant price growth in the near term, but historically, owning a home is a sure path to wealth creation. When you consider the tax advantages of owning a home and the increase in value even if it only follows regular inflation rates, new homeowners will incur good debt.

Is college debt good debt? Many are of the opinion that education is important and the resulting debt from financing it is still a good debt. That is provided the student finishes and graduates. Statistics show that lifetime earnings of those with bachelors and masters degrees are substantially higher than those with only a high school education. I have many former college students in my workshops who have not graduated and have substantial student loan debts. Those debts become good debt and will be well worth it when they finish their degrees.

Is all credit card debt bad debt? Not necessarily. Often, young persons will use a credit card like it is going out of style. They will pay for movies, dinners out, concerts, and other fun items with their credit cards. That is some bad debt; debt where you have little or nothing but memories to show for it. I think the responsible use of credit cards is in purchasing assets for your home or car. Use the card for furniture, needed appliances or a major car repair. That way, when you are on your couch writing a check for your Visa card payment, you are sitting on your asset. (A little finance humor.)

Vehicle debt can often be termed good debt. Your car is an economic development vehicle. It gets you to work on time and gets your kids to school. Is spending 2 hours plus on a bus or train daily the best use of your personal time? It is a matter of opportunity cost. How much is your personal time worth?

In the end, I think that the difference between good debt and bad debt is subjective. Our income, education, and cultural background all play a role in how we view the value, really the personal value, of our debt. 

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Our next financial workshop:

Today's Real Estate Market and Tips for Purchasing Foreclosed Property
Saturday, October 13, 2012 - 10:30 a.m.
Chesbro Financial Center, San Jose, CA

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