Debt Series Part 1: Speed Debting - Smart Money Seed

4/12/17

Debt Series Part 1: Speed Debting

Don't waste your time dating bad debt. She's rude, unfaithful, and will make you pay for everything.


No one wants to be in debt. Debt doesn’t just take a toll on your financial well-being, it’s also one of most common causes of anxiety and stress. But what if debt didn’t have to be a bad thing? Is there such a thing as good debt?

Avoiding debt altogether is definitely preferred, but unfortunately life doesn't always make this possible. Education, a house, or kids can turn your bank account upside down, but this doesn’t mean your financial prosperity is doomed. Some financial professionals disagree with the notion that good debt exists. Instead they say there is debt that is preferable and debt that is not preferable. In any case, the type of debt definitely matters.

Let’s make some basic debt categories in order to classify the most common kinds of debt.

Horrible Debt - does not hold its value over time; often used to finance a way of living (fashion, gadgets, eating out, vacation, etc.) 

In general, if the debt you’re taking on only provides the value of pleasure, it’s probably horrible debt. You should always do your best to avoid short-term loans like payday loans or cash advances, and by "do your best" I mean please, for the sake of your bank account, never take out a payday loan. These loans come with super high interest rates and can cause a major hit to your credit score. Even worse, people that take out just one payday loan are much more likely to fall into a cycle of taking out more and more cash advances. Make life easier on yourself and never take on horrible debt.

Don't worry, if you've already fallen into the trap of a cash advance we've got you covered. Here's what to do:

  • Never, ever take one out again
  • Check out our blog each week for more awesome articles

OK Debt - backed by an asset, but the value decreases over time

The easiest example of ok debt is a car. You’ve all probably heard the saying “once you drive the car off the lot, it will lose half its value.” With the exception of classic cars that can sometimes appreciate with age, this saying is pretty accurate and is a perfect example of ok debt. Although the value of the car will go down over time, unlike with horrible debt, you still have a tangible asset. This isn't the worst kind of debt, but it's also not the best. Use ok debt sparingly.

Good Debt - will hold its value or even increase over time

Education and real estate are the best examples of good debt. Education will (hopefully) lead to an income, and over the course of a lifetime, most educated workers’ earnings will far surpass the debt they incurred to obtain the education. Unlike cars that lose significant value over time, real estate typically holds its value, and can even be used as a source of income. If you have to take on debt, this is the best you can find. Use good debt to improve your future.

Debt Free Dreams

My dreams for a debt-free life quickly diminished when I decided to attend a small, private university. Despite some of the scholarships and grants, I will still be paying off my school loans for a handful of years to come. It's not all bad though; the investment in my education allowed me to land a good job in Columbus, and I have been lucky enough to make aggressive monthly payments to get rid of that debt ASAP!

In addition to my education, I also made the decision to purchase a used car with a loan. Sure, I probably could have scrounged around for an older car and paid in cash, but I made sure that my monthly payments were well within my means. I also knew buying a lightly used car would likely reduce the amount cash I spent on general maintenance. Having said that, I now can probably count on getting a flat tire or dead battery soon.

I'm trying my best to get the most out of my money with this car. So far it has seen NYC, Philadelphia, D.C., Baltimore, Pittsburgh, the Outer Banks, and not to mention all over Ohio. Looking forward to many trips to come!

How does your debt stack up?

Next time you are taking on debt, see if you can decide which category it would fall into. Are you taking on debt to live a certain lifestyle? Or will this debt hold it’s value over time?

Remember, just because some debt can be labeled as “ok” or “good” doesn’t mean you should go take out a new loan to buy a Tesla Model X or a Beverly Hills mansion. If at all possible, try to avoid debt altogether and remember to live within your means. Your savings account will thank you.

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