One of the most important lessons of financial education that can easily be overlooked is that not all debt is bad. In this time of great fervor over formerly zero percent credit card rates that are now at astronomical levels, it’s not easy to see any debt in a positive light. Wisely used, however, debt can be a wealth management tool that allows an investor to grow money while also living quite comfortably.
With this in mind, I want to offer the following financial education tips regarding debt.
Good debt enables the purchase of assets that accumulate in value over time. It may be hard to remember that real estate does actually increase in value over long time frames, but it does. Real estate is also an inflation hedge, and it is commonly acquired with good debt.
Bad debt is associated with high interest rates, and is used for assets that decrease in value in the short term, only to never regain their original value. As much as I hate to say it, a good example would be clothes.
Debt frequently provides tax reducing benefits; this is an interesting but dynamic irony, which ultimately means that our tax system encourages debt, but that’s a topic for another day.
Debt allows us to purchase beneficial things that we would otherwise not have. My very first debt experience was with the purchase of my first car, an orange VW bug, in high school. The car allowed me to get to my job, and it also gave me the opportunity to learn about car maintenance, responsibility and personal finance. I sure hated using my income for car payments instead of buying clothes, but I also learned the good, the bad and the ugly about debt first hand with that little orange bug. In retrospect, understanding that I had to save enough money to fill my car with gas at the then high cost of 53 cents a gallon was only a small part of the financial education I received from that cute VW.
View the cost of debt with an historical perspective. With mortgage rates still near all-time lows, it makes sense to lock in those low rates. It’s hard to imagine that the prime interest rate in the U.S. was almost 20 percent in the early 1980’s! There is a great probability (one of my favorite concepts when it comes to money and investing) that rates will again be in the teens at some point in the future. If you have a mortgage at 5%, and you can earn 12% on your money, that mortgage debt just got sweeter than simply providing a nice home.
Be strategic and smart with your debt. Make the use of debt part of your overall financial plan. Look beyond the house, the car or the purse; look at using your financial resources to make a purposeful and rich life.