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Question:


What is “good” debt?
-MichiganMaryam


Answer:


If you borrow money to finance consumption – a new pair of shoes, dinner, a vacation – that might be considered bad debt, even if it’s a really nice pair of shoes. It’s best to avoid running up debt on such transitory and ultimately unrewarding purchases. Once you’ve bought them, they’re bound to decline in value and utility almost immediately, or even sooner in the case of something like a meal or a night at the theater. Meanwhile, the bill remains to be paid. Money that you borrow in the expectation of having an asset that will rise in value, save money or produce income in the future can be thought of as good debt. The most obvious example is a mortgage; if you had to wait to buy a home until you had every penny saved up, you’d be renting for a long time.

Student loans could be good debt, too, although an education is a less tangible asset than a piece of real estate. Students must take care to ensure that they borrow for courses of study that will make them more employable, and they should be committed to finishing their degrees. As for borrowing to invest in the financial markets, that may not be a good idea. If assets like stocks or bonds are bought partly with borrowed money and then lose a significant portion of their value, investors may be forced to sell at the worst possible time. In the end, an essential feature of good debt is the ability to pay it back comfortably.

-Conrad de Aenlle



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