Lesson 2: Good and Bad Debt

There are two kinds of debt. Debt that makes you money and debt that costs you money.

• Debt to buy a house - Good. You need a place to live, plus homes appreciate in value.
• Debt to expand your business - Good. Because your expanded business will increase your sales and ultimately your bottom line.
• Debt to buy a big screen TV - Bad. By borrowing, your only making the price of the TV more expensive, and the TV will only depreciate in value. In 5 years if you try and sell it, you'll only get pennies on the dollar.
• Debt to go on vacation - Really Bad. After the vacation is over, you are still paying for it, plus interest, and have absolutely zero to show for it.
• Debt to buy a truck for your job - Good. You're a carpenter or contractor. You need a truck. It's a necessary tool for you to make your income. Debt to buy any tool needed to make money is good debt.
• Debt to go to college - Good. You are investing in yourself and your future. Your education and degree will open many opportunities for you and usually lead to much greater income.

Debt to buy a car - Necessary. In today's environment, you need reliable transportation. Your job and livelihood most likely depend on it. And let's face it. A car is an expensive purchase that few can afford to pay cash for. But are you borrowing to buy the 1-year old lightly used Toyota Camry? Or are you buying a new Lexus? Both will get you reliable transportation, but one is a smart play and one not very smart. Unless you put a whopper of a down payment on the Lexus, it's a bad play. The second you drive it off the lot, you've lost about 15% to 20% of the car's value. Cars, even great cars, always lose value over time.

Ultimately, debt should be used only productively. It should be used to better your situation. Getting into debt just because you want more stuff, or you want to live nicer than you can afford, is stupid and harmful.

Do yourself a favor. Don't borrow to get more stuff or live beyond your means. It's a trap and ultimately makes you a slave to the lenders. Save and pay cash for the things you want.