Debt comes in many shapes, sizes and forms. To a degree almost everyone I know has some form of debt. Well, with the exception of just a few people but they are not considered the norm in the American society. In our country, it is normal for people to accumulate debts to pay for certain items. Most people cannot pay for college unless they get scholarships, assistance from parents, or take their time to pay for their college education as they earn the money to do so. But as I am sure you have heard most people graduating today have student loans to repay after they finish their education. Most people also do not have the means to buy a new car without financing at least part of the new purchase. And almost anyone would need help or assistance in buying a home or someplace to live.
Now those could be considered acceptable debts by some, with the exception of maybe the automobile. But there are some types of debt that just about everyone agrees are bad and should be avoided if possible. Those debts are the ones that are created, and no asset is really apparent after they are created. Credit card debts fall into this category as will most consumer forms of debts. These debts represent a staggering amount of money in the American society. If the truth is told, I will wager that consumer debt is greater than student loan debt. I have read many articles on debt, and it is estimated that the average American household has at least $15,000 in credit card debt. And the worst part of these debts, besides the fact most do not have any real assets to show for their creation, is that the interest rate associated with them is astronomical in nature.
At least with an automobile loan, you have an asset once you have paid for the debt, although an asset that is not worth near what you paid for it. But an automobile will allow you the freedom to seek employment that may otherwise be considered off limits due to the distance from where you live and the place of employment. The key here is not to buy out of your means. That means if you can only afford a used automobile that costs $10,000 seek out the best that you can and buy it with cash if possible. Then as you can afford more expensive automobiles, save up for them and pay cash as these really are not investments but consumer debts that just happen to be associated with an asset.
Education and mortgages are slightly different in nature. An education can provide you with the means to get better paying jobs and affords you the opportunity to accomplish things that may not have been available otherwise. Investing in an education can make a huge difference in your lifetime earning potential. Some see this a waste of money, but I truly believe that an education is the key to more opportunities for you and your family. I know from my own family my mom’s parents did not have a college education but knew the value of one and insisted that my uncles and mom go to college and get their degrees. My father’s family was better off, and both of his parents did have college degrees, so he too obtained his education. My parents and my mother’s brothers all had degrees, and I think had more opportunities than say my dad’s brother who did not obtain a college degree. His standard of living was not even close to that of the rest of my family. And I really believe that his lack of education, combined with some other flaws, contributed to his lack of earning potential. Invest in yourself and obtain some form of higher education even if that means taking on some additional debts.
A mortgage is another form of debt that I personally feel is one that is worth having. For some renting will and may always make the most sense depending on one’s location and means. And as the real estate bubble that burst in 2008 and 2009 showed that real estate can and will go down in value. But in most instances, real estate should at least keep pace with inflation. I know I bought my condo in 2006 when real estate prices were high but not extremely out of balance. Just two years later the entire real estate market was turned upside down. As an example, I will use my condo that I purchased in 2006 for $115,000. All of the units around me were purchased within six to eight months of the others for about the same price. My neighbors sold their unit about 2007 for $125,000 to the units second owner. They got married and started a family and put the condo on the market asking what they had paid for it in about 2009 after the real estate bubble burst. Two years that condo sat on the market, and they finally sold it in 2011 for about $105,000 or a $20,000 loss. The condos five years later are back to the prices that my neighbor bought theirs for in 2007 or about $128,000. So I have had my unit for ten years only to see it go up about $13,000 from my purchase price and about a breakeven point where they were at the height of the real estate bubble. Remember, a mortgage for a primary residence is not a bad debt but also remember that your primary residence should not be viewed as an investment either. Always look at your situation before you purchase a residence and decide if it is indeed something you want to undertake.
If you have several forms of debt, feel free to sign up for my email newsletter and announcements and receive my spreadsheets for budgets and debt reduction as a thank you. I promise I will not bombard you with unnecessary emails, but only send you things of true importance. And as always, if you have any questions or need any additional information, feel free to contact me directly or leave a comment on this post.
