How Should We Handle Debt in Our Daily Lives?

First things first, let’s be real. Debt in all its forms is not something we ideally want to carry and if you have the financial means to avoid it, you definitely should.

Now I know what you’re thinking. Yes, debt is a tool. And it’s a tool that has allowed many to prosper and achieve goals of home ownership and many other things. However, it comes with its own risks and perils and if you have liquid cash available, you really shouldn’t needlessly add on debt to your financial situation unless it’s actually necessary. Too much leverage, in any matter, regardless of what it’s used for is risky! Otherwise you'll be stuck battling the credit card monster.

Let’s go over a few scenarios where you might find debt beneficial and see if that narrative actually checks out.

Good Debt vs Bad Debt

Are there scenarios in which debt is beneficial in helping consumers achieve their goals? Yes, there absolutely are! For example, any type of secured debt is commonly referred to as good debt. It’s called good debt because it helps your credit and aids in diversification of your credit portfolio. Mortgages, home equity lines of credit, 2nd mortgages, auto loans are all considered good debt. As opposed to bad debt like credit card debt, personal loans, unsecured lines of credit, etc., which can for the purposes of credit be detrimental to your credit score (if utilized improperly).

Yes, there is good debt and there is bad debt but at the end of the day, debt is debt. For hundreds and even thousands of years, debt has served a purpose but that doesn’t mean we should borrow “just because” we can.

If you have the money to pay off your home purchase with cash and without a mortgage you should really try to do so.

Bad debt is referred to as bad debt because it can have a negative effect on your credit worthiness if you have too much of it. For example, consumers who utilize too much credit or have maxed out credit card balances will have a much lower credit score than those without. For this reason, credit card debt is the typically the worst type of debt you can carry.

Tax Savings/Implications

Some consumers might argue that there are certain tax benefits to carrying a mortgage. Yes, there are tax benefits when you itemize deductions on your taxes and pay interest. However, these are interest deductions so you can only save money if you’re “paying interest”. This doesn’t actually make paying interest a benefit it just makes it a little less harmful. Overall it reduces the tax liability you’d otherwise pay on the interest portion of your mortgage payments.

Saving money on taxes from your mortgage is not reason enough to justify maintaining a mortgage balance if you truly don’t need it. The same goes for other types of interest payments. Paying interest just to later get that interest reduced on your taxes is a bit of an oxymoron and not something you want to do unless you have to.

Debt as a Vehicle for Speculative Investments

Some people might advise you to take on margin debt in order to outperform on your portfolio. Yes, if you are successful you’ll have had gained a lot more but the reverse is also true and this is often times not worth the associated risk. It can cause you to have to sell off other assets you bought without margin and can be detrimental to your portfolio. This can really have a negative impact on your investment outlook and unfortunately has caused people to go sour on investing altogether. Anytime we are borrowing money to make a speculative investment it’s usually not a good idea, since we have the possibility of losing money we never had in the first place.