Not All Debt is Bad

This is an article by Adrian J Cartwood of, who shares his opinion on good vs bad debt. Be sure to leave your thoughts in the comment section below.

Debt is Like Fat - Good vs Bad

If this were debt…it would be the bad kind.

If all debt was bad, surely it would make sense to avoid it completely?

I can't explain why this is wrong without using a whole lot of boring numbers and calculations, so let me use food as an example, instead.

When considering a healthy diet, fat is considered “bad” so it’s best that you don't eat any fatty foods, right?

Except that if you avoided all foods based on their fat content, you would avoid eating all meat, fish, and many vegetables, including avocados.

In short, you would probably starve.

So, you learn about the different types of fat: the sorts of fat that you get from fish and vegetables is good fat and you can – and should – eat it. But, trans-fat and animal fat is bad fat and you should eliminate it from your diet.

To stay healthy, you exercise – of course – and you avoid bad fat. Simple. Similarly with debt: it's true that buying a stereo on your credit card is bad. But, not all debt is bad.

For example, would you really have been able to buy your house if you had to save up the full purchase price and pay cash? And, would you really have been able to afford to go to college if you didn't get that student loan?

Clearly, some debt is good debt (e.g. your house and student loan) while other debt is bad debt (e.g. credit card consumer debt). And, it would stand to reason that a healthy financial life would entail paying off all of your bad debt as quickly as possible.

So, this is where current financial thinking is concentrated: on creating methods (such as the Debt Snowball) to eliminate this “bad debt” as quickly as possible. But, this is where our food analogy begins to break down; you see, this good debt and bad debt distinction only applies before you get into debt.

Once you have debt, it is no longer “good” or “bad”…it now becomes either cheap or expensive debt. It no longer matters what the loan was for, but how much it costs you every month in interest. It's “cheap” if the interest rate is low (such as for student loans and home mortgages), and “expensive” if the interest rate is high (such as for credit cards, and auto loans).

Once you have some debt, you should first pay off your expensive debt as quickly as possible. After all, where could you find a better investment than paying off a 13% auto loan or a 19% credit card? But – using the principal that money saved is exactly the same as money earned – if you have a 2% student loan or a 4% mortgage, surely you could do better than paying it off?

Even when the stock market and real-estate markets are fluctuating, over the long-term you will earn far more by putting your money into investments, rather than paying off these low-cost 2% – 4% loans. Remember, it's never a good idea to whip out your credit card to buy something that you can't afford to pay for in cash. But, that doesn't mean that all debt is your enemy.

Similarly, use the debt that you already have to help you get your financial life on track by considering how it helps – or hinders – you in making the kind of investment decisions that will help you improve the financial quality of your life.

Now that you've heard Adrian's take, share your thoughts on debt in the comments below.

Adrian J Cartwood is a self-made (and, recently-retired) multi-millionaire and author of the personal finance blog “How To Make $7 million In 7 Years” where AJC blogs about his personal journey from $30,000 in debt to $7 million in the bank. AJC (in conjunction with popular blogger and author, Debbie Dragon) has just published his first book, “Share Your Number“!

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  1. I think all debt is bad. i think we have created this notion that mortgage and student loans are good debt.

    • AJC 7million7years says:

      @gary g Mortgages and student loans are only bad (or ‘bad debt’) if you can afford a reasonable house and a decent education without them.

  2. A mortgage is definitely one way debt can work for you. I think there are some where, at the very least, debt is neutral. As in, it’s not good because who wants to be in debt, but it’s also not bad because it’s necessary for quality of life. My husband needed oral surgery ($6k) and dentures ($2k). We were paying down student debt, so we didn’t have it. But I wanted my husband to be able to eat solids so… As a bonus, he wasn’t ashamed of his smile for the first time in nearly two decades. Well worth going into more debt.

  3. says:

    I’m a big fan of keeping low-interest, gov’t-subsidized loans — like mortgages — while we further our business and investing goals. We can “accelerate” time by using leverage.

    • AJC 7million7years says: “We can “accelerate” time by using leverage.” V. nicely put: Like most things in life, all good when used in moderation.

  4. Personally, I think having a mortgage is a good form of debt for me personally because it allows me to fulfill some other dreams I have in life that aren’t tied directly to money.

  5. Christian L says:

    Adrian,So if I understand you correctly, debt is considered good or bad depending on what it paid for?-Christian L. @ Smart Military Money

    • AJC 7million7years says:

      @Christian L Hopefully, we all agree that it’s bad to buy something that you will eventually throw away on your credit card. Since it’s also expensive (circa 19%), this is an easy decision” pay it off … now!
      But, what if you bought a car on a low interest loan (you shoudn’t have; it’s still bad debt since the car depreciates over time. Instead, you SHOULD have negotiated an extra discount for cash)?
      Once you made the mistake, should you compound it [pun intended] by paying down the, say, 1% loan only to leave your other loans and investment funds languishing?

  6. The Barn Cat says:

    This is exactly what I was discussing in my most recent blog post.  The only debt I have right now is a sizable student loan, and I am having trouble deciding whether it is worth it to throw extra money at it right now with a million other possibilities, including saving for retirement.  It is tough to make a decision when I want as much liquidity as possible with our impending spring farm plans.  You can find the whole story on my blog, and opinions are welcome!

  7. Money Life and More says:

    I think some debt is acceptable debt that helps you reach your goals and make more money elsewhere. There definitely is bad debt though… credit cards being one type!