“It makes more fiscal sense to be 100% debt free than to carry some debt. “

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April 28th, 2006

This is the biggest myth in all of personal finance. It is the biggest lie, it is the most well known, and it harms the most people.

There is no reason not to have any debt today. Centuries ago, you might have been sold into slavery if you had a significant amount of debt, but in today’s society debt is like fat: there are good kinds and bad kinds. While it’s true that too much bad fat is a killer (think of eating 5 donuts for every meal, every day) if you truly ate a completely fat-free diet, you would be living a similarly unhealthy lifestyle.

What is bad debt? Bad debt is money that you borrow that does nothing to improve your life. Living beyond your means and using credit cards to fund shopping sprees that you can’t afford means you are taking on bad debt.

What is good debt? Good debt is money that you use to leverage valuable things. A home is (generally) a good investment, so mortgages can (generally) be seen as a good usage of leverage. Keep in mind, that even good debt is only good in the right amount. Too much of any kind of debt is unhealthy.

But the belief that any debt is dangerous and should be avoided is just as dangerous as taking on too much debt.

It sounds unfair, but good credit involves walking a particular line. If it was easy to do, then there wouldn’t be benefits to having good credit.

Entry Filed under: Financial Myths
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