debt: It’s not nearly as bad as everyone says it is

[THE Bigzoman]

The very idea of owing money to anyone is anathema to me. I plan to stay debt free as long as possible.

Meh,


I used to feel the same way. Then I spent a lot of my spare time learning about financial services and realized that debt is okay as long as you follow one basic rule, not being a dumbass.

[chazus]

as you follow one basic rule, not being a dumbass.

So having health insurance, getting sick, and then your health insurance decides to terminate coverage, is 'being a dumbass'?

[Independent voter]

Say I have a farm with a 1,000 acres worth $1 million. I take out a loan on the land and now I can buy new equipment and rent out 4 fields adjacent to my own. I'm now making 4 times as much. On paper I'm 4 times as big and if a crisis hits odds are I'll be able to survive cause my margins are small.

Same with school. The OP talks about student aide and if you're smart and go into STEM or something like it, borrowing is well worth it. An art history degree not so much.

Or something like that.

[Celista]

Say I have a farm with a 1,000 acres worth $1 million. I take out a loan on the land and now I can buy new equipment and rent out 4 fields adjacent to my own. I'm now making 4 times as much. On paper I'm 4 times as big and if a crisis hits odds are I'll be able to survive cause my margins are small.

Or something like that.

Business debt is different, if you're set up correctly you do not have personal liability.

[Daerio]

#1 cause of bankruptcy in America is medical debt. Strangely, other first world countries don't have that problem.

[THE Bigzoman]

So having health insurance, getting sick, and then your health insurance decides to terminate coverage, is 'being a dumbass'?

I was referring specifically to borrowing and not when security blankets are literally yanked from under people, but I can see you have more skin in the game than I do so I ain't mad.

[Aeluron Lightsong]

Debt in medical bills can die in a fire.

[Kyriani]

I owe nothing to no one but myself... and I intend to keep it that way. Debt of any sort would break me right now.

[THE Bigzoman]

Say I have a farm with a 1,000 acres worth $1 million. I take out a loan on the land and now I can buy new equipment and rent out 4 fields adjacent to my own. I'm now making 4 times as much. On paper I'm 4 times as big and if a crisis hits odds are I'll be able to survive cause my margins are small.

Same with school. The OP talks about student aide and if you're smart and go into STEM or something like it, borrowing is well worth it. An art history degree not so much.

Or something like that.

Except food markets are very competitive, so you wouldn't make four times as much..

In your scenario, it seems more likely that you'd spend more resources producing food than what you'd take in from them: equipment + working 3 times more than usual is a pretty high marginal cost.

[Deathquoi]

Federal student loan debt is different from most debt individuals take on. Payment plans are flexible, are capped at a percentage of your income, and are written off in the case of permanent disability or death. They are also written off after x years, with lower repayment terms for individuals who work for 501(c)(3) organizations, as nonprofits tend to pay less than their equivalent for profit counterparts.

All other debt (for individuals, not for organizations) is kinda poop and should be avoided as much as possible.

What about mortgages? There are other kinds of debt that aren't bad.

Basically, the way I feel about debt is this: taking on debt is ok unless you're doing it to consume a good or service you could not afford. If you're putting a vacation on a credit card without an ironclad plan to pay it off quickly, it's bad. If you're buying a house or a car and you've budgeted the money, I think that's fine. Without mortgages we'd all be stuck renting forever, which is really just paying someone else's mortgage.

[May90]

I think there is a difference between, let's call them, healthy and unhealthy debts.

Healthy debts are the one an individual, a business, a country takes in order to boost their economies long term; for example, you take a loan to get higher education, which then increases your productiveness and lets you eventually pay the debt off, while regaining the skills and knowledge you got - win. Same way, when the US takes a loan from China, the government puts this loan to good use by investing in science, technology, industrial sector - which leads to economical growth allowing the US to pay the debt off eventually, while regaining the economical bonuses received as a result of investment.

Then, there are unhealthy debts. For example, you really want to buy a new gaming computer, but you are short on funds... You take a loan and buy the computer, and the time you could spend on improving your working skills to increase your income in the end, you spend playing games instead, doing nothing to be able to repay the loan. Such loans harm your economy, both short term and long term, and they tend to pile up, eventually leading to the situation in which your economy is ruined. Same way, for example, Greece keeps receiving financial help from EU, but doesn't invest it in economical growth and only uses it to solve the immediate problems - leading to it needing more and more help and never being able to pay it back.

Ultimately, debts in a healthy growing economy are absolutely essential, and I think some Nobel winner economist made approximate calculations and came to the conclusion that the optimal amount of governmental debt is the one equal to GDP - which is close to the case in the US, for example. However, poor debt management and poor investment choices can make debt into poison, rather than medicine.

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One thing people above mentioned, however, is that debts are quite harmful psychologically. I am not sure how to address this problem, rather than try to change the attitude. I personally do not have any real debts to speak of, so I will never understand what it's like to have to repay a $100k education loan and $300k mortgage in a couple of decades - indeed, sounds rather damning.

[McFuu]

What the article is really saying...

Taking on secured debt is a good thing. Debt that has a value after you pay it back, ie; education, a home, starting a business. All debt is a risk but certain kinds of debt are a risk that has a higher chance to turn around. Of course all debt can back-fire in one way or another. Pointless degrees aren't going to return the value that you put into them, a home outside of your ability to pay is a burden, business could fail etc...

There is bad debt, too many credit cards, I consider auto loans for the most part bad debt (almost never return value, and it's hard to justify if the overall high cost of purchase - vehicle depreciation is worth it in the end over used vehicles.), extending credit to buy house hold items, list goes on. Basically unsecured debt (I believe auto is considered a secured debt, but if the bank takes your car, you will almost still owe the bank anyway.)


So yes, debt is a good thing, as long as the your debt is tied to actual items of value.

[Eviscero]

And this entire conversation is going to ignore the other half of this equation?

What about the people holding those debts, and living their entire lives based on usury? Those people sure add a lot of 'value' to the economy.

What about the fact that 40 years ago, interest payments on debt for the average American was almost nonexistent, and now "the average household is paying a total of $6,658 in interest per year. This is 9% of the average household income being spent on interest alone."

When 10% of the economy is going towards paying interest... it's a pretty serious problem. People hate math though, and they hate economics even more, so I can understand why nobody really seems to get it, or care.

You are so wrong. People hate math WAY more than econ! ;P

[Celista]

What about mortgages? There are other kinds of debt that aren't bad.

Sure, I was going to include it but then again many/most Americans have more house than they can afford...paying off your credit card each month = good. Business debt is good if one is responsible about it.

[Deathquoi]

Sure, I was going to include it but then again many/most Americans have more house than they can afford...paying off your credit card each month = good. Business debt is good if one is responsible about it.

Some people are confused by the difference between what they can get approved for and what they can afford. My wife and I recently bought a house and the mortgage company approved us for up to 500k. Obviously we did the math and determined that 300k was really more of our sweet spot in terms of not being slaves to our mortgage payment and so we spent 300k on a modest starter home (that's what such houses go for in our area, we are talking about a 3 bedroom, 1500 sq ft ranch with a nice yard).

I know so many people that go out and spend exactly what the bank approves them for and that is such a dangerous thing. I know people that rent to own their TVs from Aaron's or Rent A Center. I know someone who just got their car repossessed for the 3rd time and immediately turned around and bought an Audi at what I'm sure was an astronomical interest rate.

For some people, debt is a tool. For others, it's an addiction.

[Barnabas]

Say I have a farm with a 1,000 acres worth $1 million. I take out a loan on the land and now I can buy new equipment and rent out 4 fields adjacent to my own. I'm now making 4 times as much. On paper I'm 4 times as big and if a crisis hits odds are I'll be able to survive cause my margins are small.

Same with school. The OP talks about student aide and if you're smart and go into STEM or something like it, borrowing is well worth it. An art history degree not so much.

Or something like that.

In a bad year you net -$25000 for your 1k acres of land. If you are renting 4 fields you are losing -$25 usd per acre for those as well.

[Daerio]

One thing people above mentioned, however, is that debts are quite harmful psychologically. I am not sure how to address this problem, rather than try to change the attitude. I personally do not have any real debts to speak of, so I will never understand what it's like to have to repay a $100k education loan and $300k mortgage in a couple of decades - indeed, sounds rather damning.

Just teach people it isn't a big deal to welch on huge debts they owe, make it legal and that problem is solved like a dream.

[Cricket22]

So having health insurance, getting sick, and then your health insurance decides to terminate coverage, is 'being a dumbass'?

Medical debt at least can discharged through bankruptcy. Student loans can't, neither can child support or back taxes (although working a deal for back taxes with the IRS is often possible.)

If medical debt is over $20-30K, and repayment is financially devastating, if not impossible, the sooner you file bankruptcy, the better, because it will be that much sooner you can start rebuilding. If you have any assets, move to Florida and put everythng you have into a home there first--home equity is exempt from creditors in bankruptcy in Florida.

[Barnabas]

Medical debt at least can discharged through bankruptcy. Student loans can't, neither can child support or back taxes (although working a deal for back taxes with the IRS is often possible.)

If medical debt is over $20-30K, and repayment is financially devastating, if not impossible, the sooner you file bankruptcy, the better, because it will be that much sooner you can start rebuilding. If you have any assets, move to Florida and put everythng you have into a home there first--home equity is exempt from creditors in bankruptcy in Florida.

How? The bills can't appear on your credit report.

[Daerio]

How? The bills can't appear on your credit report.

What? They can garnish your wages and steal your tax refund every year.

Oh, and then they can turn the debt over to a collection agency, and then it does appear on your credit report.