People have grown accustomed to thinking all debt is bad, that is simply not true! We all desire to be debt free, but we should not go overboard in the desire. We must understand that all debt is not created equally. We will explore a few types of debt and classify them as good or bad.
1. Mortgage – This is probably the best debt you can have, especially in today’s market. Houses are appreciating values, meaning their value (on average) goes up every year, and with historical interest rate lows, why rush to pay it off? The S&P 500 has averaged ~7-8% ROI since the 1950s and interest rates on houses are hovering around 4% right now. So let’s say you invest in the stock market instead of paying the house off early, there is almost a GUARANTEE you will make more money on average from the stock market than the house. Also, the money in the market will compound, the house won't and it is not a liquid asset.
2. Car debt - I personally think this is the worst debt to acquire, but it is a necessary evil. The moment you drive your beautiful new car off the lot, it is now a used good and has lost a good 25-30% of its value. No matter how you THINK the value of your car is, honestly it’s just not worth as much. Every mile you add on the odometer is like watching money fly out the window, the car is a depreciating asset so no matter how much you care for it, value will be lost.
3. Student Loans - Now this a tricky topic, but this debt can be good or bad depending on your area of study. If the degree is for a STEM major, it will usually end up being a good debt, a liberal arts degree might not be if you spent $100k to obtain it. Overall though, I would classify this as a good debt because it will (should) increase the overall life earnings of someone who has obtained the degree and is applying it.
1. Mortgage – This is probably the best debt you can have, especially in today’s market. Houses are appreciating values, meaning their value (on average) goes up every year, and with historical interest rate lows, why rush to pay it off? The S&P 500 has averaged ~7-8% ROI since the 1950s and interest rates on houses are hovering around 4% right now. So let’s say you invest in the stock market instead of paying the house off early, there is almost a GUARANTEE you will make more money on average from the stock market than the house. Also, the money in the market will compound, the house won't and it is not a liquid asset.
2. Car debt - I personally think this is the worst debt to acquire, but it is a necessary evil. The moment you drive your beautiful new car off the lot, it is now a used good and has lost a good 25-30% of its value. No matter how you THINK the value of your car is, honestly it’s just not worth as much. Every mile you add on the odometer is like watching money fly out the window, the car is a depreciating asset so no matter how much you care for it, value will be lost.
3. Student Loans - Now this a tricky topic, but this debt can be good or bad depending on your area of study. If the degree is for a STEM major, it will usually end up being a good debt, a liberal arts degree might not be if you spent $100k to obtain it. Overall though, I would classify this as a good debt because it will (should) increase the overall life earnings of someone who has obtained the degree and is applying it.