Why The Concept of Bad Debt Is Flawed

Debt Isn’t Bad

Private debt was invented to facilitate convenience in trade. This principle was widely accepted for most of human history. But things have changed in the 21st century. Today, many generic debt bloggers will rant about how much they hate debt with a passion and want to pay off their debts ASAP. They seem to be very debt-icated to their cause. 😛 But why would they go into debt on purpose, and then become so upset about being in debt? 😠 Isn’t that exactly what they wanted?

We don’t borrow money and pay interest to a bank out of the kindness of our hearts. Instead, I believe most of us go into debt for one simple reason; to increase our own standards of living. We take on debt because we are motivated by self interest. 🙂

Would we go into $500 of debt to buy a football? Probably not, unless it’s one that’s autographed by Lionel Messi. 😉 But how about taking on $500 of debt to experience a 3 week, all-inclusive trip to the Great Barrier Reef? Heck yes, I sure would!

If our objective or desire is worth more to us than the cost of borrowing then using debt is preferable.

If it’s not worth the debt then we don’t borrow. The same can be said for practicing mindful spending. It’s really quite simple. 😀

Nobody can force consumers to use debt. It’s possible to go through life without using debt at all. But relying on savings alone to make every purchase means losing out on choices, and opportunities. By the time a saver accumulates enough cash to start college, all his friends who used student loan debt to get ahead would already be graduating. Why would anyone want to commit to a debt free life if it means depriving themselves of opportunities? This is why I concluded that I will probably never be debt free.

Of course it’s completely possible to have too much debt, just like it’s possible to overwork ourselves. But we should all learn from our mistakes and move on. Much like being mindful of our purchases, we should be mindful of where we should be on the debt spectrum.

The Real Problem Isn’t Debt

Debt is never the real cause of people’s issues. It’s just a scapegoat.

People who say they have debt problems usually just have spending problems. They take on lots of loans to satisfy their extravagant lifestyles, and then they regret it and feel sorry for themselves for being in debt. These people are either not being honest with themselves or they lack basic self knowledge. If they voluntarily take out a loan, then that means whatever goal they want to accomplish with the loan is obviously more important to them than the cost of borrowing.

The Paradox of “Bad Debt”

To use an analogy, what would be the point if I buy a new Tesla Model S P100D and then spend all my time complaining and stressing out over how much I paid for it? I obviously value the car more than the money I traded for it. If I don’t think the car is worth its price tag, then I would simply walk away from the dealership. Sorry Elon. 😄

This is why I think the idea of good debt and bad debt is just an illusion. How can using debt be a bad thing when by definition it serves a positive purpose for the borrower? From a rational economic point of view in order for any debt to exist in the first place, it has to be the preferred choice for both a borrower and a lender in a voluntary transaction. Of course there are exceptions because consumers don’t behave rationally all the time. But most functional individuals in society are rational to an extent and are motivated by self interest. If we do something that has negative consequences then it is less likely we will do it again.

So it concerns me to learn that “struggling with debt often leads to depression, anxiety and stress.” 🙁 There are many things in life to worry about like the US presidential election next month. But I don’t believe debt should be a cause for anxiety. Getting depressed over debt is like obsessively stressing over the cost of a brand new car from my analogy above. It completely ruins the experience of whatever beneficial purpose the debt was used to pay for. It’s all about the mindset. For those with financial anxiety, I’ve discussed how to deal with the stress of debt in a previous post.

I have heard that getting a mortgage to buy a house is good debt, yet using a credit card to buy new clothes is bad debt. But to me giving debt a sense of morality like “good” or “bad” doesn’t make sense. There are no guarantees when it comes to investing. The average real estate price in Japan has been falling for 25 years. Homeowners may never see a profit from their properties. Meanwhile we know that people are judged in society by their appearances. So maybe having new clothes will attract attention from friends and acquaintances, improving one’s social life that could lead to meaningful business, career, or personal relationships.

So borrowing to buy a home isn’t always the right decision, and consumer debt doesn’t always lead to negative outcomes. Debt isn’t good or bad, it’s just a means to get what we want. 🙂

Micro-Financing Through Debt

In less developed regions of the world people don’t have access to debt like we do here in North America. Residents in these areas can’t afford to attend college, buy a house, or even buy tools and equipment to make their lives more productive. But thanks to new innovations online, websites such as zidisha.org are giving these individuals a chance to borrow much needed money. 🙂

For the first time ever these people who live in less developed countries can finally improve their lives by going into debt. 🙂 Hurray!

Kiva.org is another popular micro-lending platform that connects people who have money with people who need money. Lenders can help struggling families with small financing projects, and could even make a return on their investment. 🙂

So when we shame ourselves and other people who have debt it is disrespectful to those who don’t have access to a robust credit market. It’s a privilege to borrow money. I’m a happy homeowner today thanks to debt. 🙂 Complaining about having too much debt is like complaining about a bad hangover, or feeling too stuffed at a buffet. I get that it sucks, but it’s a first world problem. For me to express dissatisfaction about my abundance of cheap credit from a place of middle-class, western privilege, seems a bit insulting to those who are less fortunate and can’t borrow at all. 😕

So I propose we stop shaming debt. We can accomplish this by looking at debt for what it is, which is a financial contract meant to improve the lives of both parties involved. We can usually dictate when and how much to borrow at our convenience. The only debt we don’t have direct control over is government debt, but that’s a topic for another time. 🙂

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Random Useless Fact:

It must have been really awkward for the first person who discovered cow’s milk.