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Good Debt [Aug. 8th, 2006|10:24 pm]

GreenStreetBooks (aka llcoolvad) reviewed Jon Hanson's Good Debt, Bad Debt to save us all the horror of reading it ourselves. Thanks llcoolvad!

She explains the message: "Don't get into debt unless it makes you money. No, really."

I almost like this message. I just have two little problems with it: 1) It's hard to tell which debts will make you money, and 2) there are things in life more important than money which might also be worth going into debt for.

Let's look at some examples.

Student loan debt. This is good debt because you make an extra million dollars (or whatever) over your lifetime if you get a degree, right?

Except if you never get a job in your field. Or you get a degree in social work. Or you get sick the last year and can't finish school and then you mom gets sick and you have to take care of her for eight years, etc.

No, none of these things happened to me. (Except I am sort of using my degree like a social worker would, only with much less stress.)

However, I loved going to college and am glad I did it, and am glad I did it right after high school, in spite of the debt. I learned very important life skills there, like how to talk to boys without turning all pink in the face.

Maxing out your credit card while job hunting. Now, this sounds like bad debt, eh?

I did this once. I could have lived with my parents and job hunted in Dallas (actually, I did that for three months while holding a temporary job there) but instead I moved to Austin without already having a job and went into $100 worth of debt each month working three part-time jobs that didn't quite cover my expenses. I think I found a job more quickly by actually living in Austin than I would have living in Dallas.

Of course I could have looked for a job in Dallas. But then if I had found one, I would have had to have been working in Dallas. No, thanks.

Also, my credit card had a limit of only $700, which is more like $1400 in today's dollars ($1800 Australian dollars*), so it could have been scarier.

*One of the people on my friends list is Australian. I don't do this for just anyone.

Car loan. Again, obviously bad debt.

Except for me. I tried to buy a car after college so I could get a job, but I couldn't get a loan until I got a job. I was living with my parents in a huge and desolate suburb of Dallas, so the best job I could find without having a car (and, I admit, without doing the two-hour bus commute each way into the city) was working at Mr. Gatti's pizza, full time, for above minimum wage.

Then I got a car and was able to get a job that paid double. Now it's true that I could have just saved money from Mr. Gatti's until I could have paid cash for a used but reliable vehicle, but at the time I didn't know such cars existed. And now that I think of it, I might have been able to ride my bike to the three locations for the job I did get.

Given what I knew at the time, it was good debt.

(Now I have a job that doesn't require a car, so now I don't buy a car until I can pay cash for it. A car loan would definitely be bad debt for me today.)

Mortgage. People disagree about whether this is bad debt. Some people think your home is an investment, so it's good debt. Others say that actually it's just your home. You're not going to try to sell it when it's a good time to sell it, but when you want to move. If you move because the economy in your town is crashing, it's not a good time to sell, so it's not exactly an investment. Also, people move an average of every 5 - 7 years, so it gets risky.

In my case, I planned to keep my house indefinitely. So, when the mortgage is paid off, I'll only have to pay taxes (and insurance). That's definitely an investment. Also, my equity is now more than my two retirement plans combined, so it sounds like a pretty good investment from that perspective, too.

Small business loan. Good debt.

Unless you go out of business. Like most people do. Oops.

Credit card debt for clothing. Bad debt.

Unless maybe it's an interview outfit.

Credit card debt for a vacation. Very bad debt.

Except sometimes you get a once-in-a-lifetime opportunity. I have gotten several of these. Once my family went to Epcot center, except for one member of the family who could not afford it. Every time people talked about that trip, it hurt the one person who couldn't go. Once my sister lived in Belgium, and my family went to visit. Again one person (a different person) couldn't afford it, but this time I subsidized the person. Once some friends lived in Switzerland and invited me for a visit.

Now, I didn't actually go into debt to participate in any of these adventures (or I don't remember doing so), but if I had, it would have been quite worth it. For me, that would have been good debt.

[User Picture]From: llcoolvad
2006-08-09 09:11 pm (UTC)
Yeah, I agree. And to be fair to Hanson, he did specify loads of exceptions like yours, and he did admit that he breaks his own rules from time to time. His point, of course, is if you don't have debt, you'll probably be able to save enough capital to be able to do those things (vacations, opening a small business, changing jobs, going to school) without having to borrow. And more importantly, you'll have the money to take advantage of money-making opportunities that you stumble across. Those don't exactly beat a path to my door currently, so I don't know how relevant that point is to me.

I hope I come across a decent financial advice book someday. So far the best of the lot that I've read has been the David Bach "Automatic Millionaire" books. Then again, I don't seek out financial advice books; I just come across them at the library. Maybe I should be a little more deliberate. Any suggestions?
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[User Picture]From: livingdeb
2006-08-09 11:28 pm (UTC)
Stumbling across money-making opportunities. Interesting. Maybe I should read that book just to learn to recognize that sort of thing. Currently, I only notice stumbling over things like furniture legs and tiny bumps in the sidewalk.

As for your question, I think I'll make another journal entry out of that answer. (Deja vu!)
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