Personal Finance: There is no such thing as ‘good’ debt

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Most adults have been in debt or are currently paying off various loans. There’s a small percentage of people who have never gone though the process, so most of us know how it on ‘this side’. We get loans for cars, houses, school, to pay for a business, to spend money on holidays, on clothes shopping, a new gadget, to pay medical bills etc. Some of the reasons might seem more frivolous, while others are really ‘life and death’ situations that we have to take care of, hence the idea that some debt is ‘good’ and some is ‘bad’.

Before we go further to discuss this, I’d like to share with you my personal debt story.

debt

Back in 2003 if I recall it correctly I had a really serious need for a good computer. My PC was falling apart and learning web design was almost impossible, now that it would freeze at least 4 times/hour. I was passionate about running web sites (have started my first one a year ago) and wanted to learn more. Little did I know that this hobby will eventually turn into a real business, all I cared about what to learn as much as possible and my computer was doing everything to mess with me and my ‘mojo’.

So I took a loan.

The new laptop had some excellent specs (and I chose it to be a laptop and not a regular desktop computer, so that I can benefit from its mobility, too) and cost me 1000 Euro. My salary was around 200 (we’re talking Romanian wages, please don’t fall off your chairs yet), so I’d have to really save for it (which I wasn’t inclined to do back then, especially since a loan was soooo easy to take). The deal was that I’d pay the money in 36 months. I was lucky enough to have FIXED payments, so no worries about my interest going up and I knew exactly what I had to pay each month.

I could consider this to have been a ‘good’ debt, since I didn’t purchase a plasma TV or some clothing, but a ‘tool’ that actually helped me a lot. Having a good computer that would run perfectly allowed me to hone my skills and be more productive. After a year since I got the loan, my laptop was clearly paying for itself. I had people get interested in my services and they would pay me to create their web site design. In retrospect, I could have ‘sped up’ the payment (could have paid it in under a year), but there was no advantage for to me to so, not to mention the bank would have taken some commission from me, because I’d pay it off earlier (don’t ask, some of our banks really are not run normally here).

I used the laptop for more than 6 years and it earned his value tens of times, the ‘passive income’ it would get me has paid for some home improvements, new electric appliances in the home, setting up my ‘real’ business (and a lot of taxes), even the down-payment of my car.

As you can guess, we’re getting now to my second loan – for a car.

My small side business was doing OK. I didn’t earn too much, but I did supplement my income every once in a while. I’d lug  my laptop from one side of the city to another and started feeling insecure with it on the buses. The bus line that ‘takes’ me home ends up in a gipsy neighborhood and I was dead scared I’d get robbed (not impossible, looking at the people I shared the bus with). It was just a matter of time. I chose to take a cab, but this was pretty costly too, so the need of a car was pretty evident.

It would have made sense to get a second-hand car, but in my country they were very expensive because of the many car ‘dealers’ who’d flip them. On top of it, getting a decent one from Germany from instance (which many Romanians did), wasn’t such a great idea, because of an idiotic tax our Government just set: it was called ‘the first registration tax’ and it really messed things up for people like me, who wanted a reliable used car from an European country. I started making all kinds of calculations and it turned out that, to get an used car (at around 2-3K Euro) would cost me 2K more just to register it. Now that was really messy.

I have some neighbors who got a bank loan to get a better car and they paid 7k for the car (taken from Germany), the registration costs in Germany (plus driving to and from there) and the dreaded tax here. It came to cost them around 10K. It was a 50k miles USED car (7 years old) that could have been purchased NEW here at around 12K Euro.

Knowing that I don’t have this money and really didn’t feel like ‘gifting’ the State such a big chunk of my hard earned dough, I decided to save 3K for the down-payment and take a loan. My previous debt experience was also great and I thought in my mind that taking a 4 year loan for my car was a breeze.

dojomobil

This is my car. It cost me 13K euro (paid in 4 years) and the down-payment. I also had to pay around 50 Euro/month for a premium insurance the bank was forcing me to have. It was costly, if I had the money I’d have gotten it at 60-70% of the price. But I didn’t have the money and saved just enough to be able to take the loan.

It was another ‘good’ debt, since it helped me and my family move around easier (we didn’t have any cars till then), I didn’t have to worry about being robbed and didn’t have to pay a small fortune to the cab companies just to get to my clients or to job.

And then it all went to hell.

I started the car loan re-payment in April 2008. It was a pretty serious chunk of my salary (stupid, I know), but I was also earning some money off my web design business and thought things can only get better. The problem with life is that it does throw you a curve ball when you least expect it. Fast-forward to July 2009. I was correctly paying off my car and counting the days till it would become all mine. A phone call came from the main radio station (we were a local studio) and we were told the local station was closing down and we won’t have a job anymore.

We were speechless. Some of my female colleagues started crying, the males were livid. We were all adults there (30+ old), some with families and loans (I wasn’t the only in this position). It was clear that our industry (mass-media) was dying in our city and this was the ONLY station that hired and could pay some decent wages. And now this was closing down and we had absolutely nowhere to go.

The first call I made was to my accountant (I had established myself as a small .ltd and we have to hire accountants) to move my benefits from the radio paycheck to my company. Which company was earning me zilch, since I was earning enough at the radio and didn’t care too much about getting a lot of web design clients. So here I was: in debt, having to pay taxes, having ZERO savings.

Let’s say the next 3 months were difficult. I furiously started working as a freelance web designer, taking any jobs I could on Elance. I was working 14 hours/day and my health took a hit too. That autumn I had to get a biopsy to see if I was suffering from breast cancer or not. It was the lowest point in my life and only my determination to get out this mess helped me through. My family decided to help me pay everything I needed help with (food, electricity, the internet etc.) while I put all my earnings towards my taxes and my debt. Fortunately the biopsy came negative, so at least I didn’t have to deal with such huge health issues.

Little by little, my small business started building up. My clients were ecstatic and providing me rave reviews, which made more clients want to work with me. I was able to raise my rates (so that I didn’t have to work almost all day long) and slowly pay off my debt.

I WAS LUCKY

That’s all I can say. Even if it all seemed to be out of any control back in 2009, I was lucky in many ways: got good advice from successful freelancers to just try and grow a business, got lucky health wise, got lucky to have amazing clients who understood that my work deserves a decent pay, lucky to have such a wonderful family who supported and encouraged me, lucky to have a partner who, even if he was angry at me for taking on the loan, never stopped telling me that I WILL MAKE IT.

My car was paid off entirely until March 2012 and I have been debt-free ever since. I save money now and would NEVER put myself through this nightmare ever again.

I could say my debt was ‘good’. Both items actually helped me and my family. The laptop kickstarted my small business and the car even got me clients (placed some decals on it to promote my portfolio and had people call me to ask for a web site design). And yet the entire process left a bad taste in my mouth. For me debt is bad because:

  • you are stressed – having to pay EACH MONTH money to someone is not easy. I was always a sound sleeper, but believe me my nights are better now.
  • it’s risky – we all think life will get better, but it doesn’t. Having debt meant I couldn’t recover as fast as I would have from losing my job. Not to mention that, if I couldn’t pay it anymore, I’d have lost my car, my initial payments and had to pay more (if the bank tried to sell it and didn’t get enough money). I can’t even imagine the mess.
  • you’re not working for yourself – I have friends who have taken various loans and, when we talk about money, they tell me “I have to pay the bank”. They don’t pay their loans, they pay the bank. It’s awfully frustrating to get a paycheck and, instead of planning the money for YOUR needs, to have to first pay .. the bank.

I think back when I started taking the loans and kick myself for not saving. I didn’t have huge expenses (my family helped a lot, so I could have saved even 70% of my paychecks), I didn’t have a family, and yet I just squandered money. When I had to really make an effort, I chose to take a loan, instead of getting my act together and budget.

This is my experience with debt. I don’t think it’s ‘good’, even if you’re paying off a house or your college education. Sure, it’s a difference to take a loan for breast implants or to provide a home for your family, but the end result is the same: you owe money. You stop being able to make plans, you stop being able to take on various opportunities. You’re tied to the damn bank, you’re scared that, if anything happens to you, the mess you’re in now is just the beginning. Anything can turn your finances upside down, you don’t have the joy of being able to budget your money for YOUR needs, you’re just paying the bank each and every moth.

What’s your debt story? Do you consider you made a mistake by taking the loan(s)? Have you paid it off yet? Are you close to?

23 COMMENTS

  1. Our debt now is our mortgage and car loans. Yes, we do have car loans but they are at interest rates below 2% so we strategically did that on purpose.

    We did recently pay off $40,000 in student loans which feels great!

  2. Like you, I’m not a big fan of when people differentiate between good and bad debt either. Debt is debt and all debt has risks. Sadly, debt has become so commonplace that people really don’t consider the risk but just assume debt without a lot of thought. Glad you were able to payoff your debt and are in a better place now.

    • Imagine what face many people make when we tell them we don’t have any debt to pay. Just as you said, having at least one loan is so commonplace that people who are debt free are now the weird ones 🙂

  3. That’s aFascinating position on debt. I’d expected you to only have experience with bad debt, but your car and laptop purchases seem to be different. I don’t think everyone has the luxury to go debt free their whole lives, but it’s an admirable goal.

    • Well, as long as we budget and save most of the things we’d get a loan for should be covered. We’re saving for my husband to get a new car in few years (we’re using mine now, but we’ll need a bigger one) and we’ll also start saving for our daughter’s college education. Instead of having to take a loan, we’d have the money saved.

    • You are so right about it. When our friend came to us in 2009 (when I just got the good results on the biopsy and struggled so much with debt) and invited us to come to him in NYC, I almost thought he’s smoking something ‘good’.

      I mean both me and my husband were out of jobs, I was seriously in debt, working 14 hours/day to pay the car, just had a cancer scare and here comes this guy talking about us going on the other side of the world.

      If it wasn’t for my husband who said that, come hell or high water we need to take on this amazing opportunity, we’d have never done it. It wasn’t easy, but we managed it.

      Being in debt makes you more careful with what opportunities you take and you can sometimes lose some amazing ones. Fortunately for us my husband was right, we managed it all, but I would have missed the chance of a lifetime to go to NYC and stay there for 6 months at our friends’ house.

  4. It is refreshing to know others view all/most debt as bad debt. I recently ran a poll on my blog and 70% of the responses indicated that there is good debt. There may be less bad debt, but I don’t believe carrying any debt is good.

  5. I understand that debt is debt and I get the whole good vs. bad debt debate, but honestly–unless you’re ridiculously wealthy or have parents that are loaded, chances are you will accrue debt at some point in your life, whether it’s to go to school, buy a car, buy a home, etc. I think people do the best they can. I don’t advocate taking out loads of debt, but I think there can be extremes on both sides– either someone who has tons of debt and just keeps racking up more, or someone who is a miser but completely debt free.

    • I come from a poor family and, if I put my mind to it, I could have gotten the car loan-free. Same with the laptop (have bought 2 new ones since then, a small one for our travels, 2 tablets, a DSLR camera, a camcorder etc.). If I just made a small effort to not spend all my money, it took me little time to get the money needed for my gadgets.

      I do agree that not all people have a choice when it comes to getting a home or a college education, but many of the things some get into debt for can be easily be paid off with some saving.

      As long as we don’t get in debt for all kinds of frivolous things and work our way out of it, we should be fine. I still have to see someone who is debt free and miserable, all my friends who are in debt are actually skipping vacations and being frustrated with the limitations this gives them. Since the economy is bad in most countries, many have lost their jobs and are really struggling. I think that, if the economy was good and we all had good wages and not the fear tomorrow the paycheck will stop coming, debt wouldn’t be such an issue. But the economy is bad and I don’t think it’s getting any better.

  6. I accrued $60K of debt when I went to school and it stressed me out to the point where I am really debt-averse. I don’t even really want to buy a place unless I can put most of it down in cash and take out a very small loan (if any) for a mortgage.

    I’m thinking like 50% down on the house here, preferably 90% down. That’s the only other debt I’ll take on. For cars, I’ll buy them used.

    • I think my next car won’t be a new one either, or at least it will be paid in cash. The home is a huge investment, that’s for sure. The more you can have for the down-payment, the better it will be for you, as you need to pay the smaller loan. Many of us, who are finally debt free, kinda turned ‘sour’ when it comes to debt, especially if we had some problems paying it off.

  7. Great article Ramona. Good debt is an oxymoron. I have student loans to pay and while education debt is not as bad as other types of debt, all I am focussed right now is to find a decent paying job that i love and settle the debt before I make any purchases or start saving

    • I think what bothers me more with the idea of ‘good’ vs. ‘bad’ debt is that it makes some of the people who have taken ‘serious’ loans (mortgage, student loans, business loans) to feel OK about this and not consider they need to really focus on paying it off. It kinda makes you feel good that you didn’t get a diamond ring for your money, but you actually invested in a home for your family, in your business or future education.

      What helps everyone more is to realize that, while debt is not something to be ashamed of (not my intention to suggest this either), it’s a compromise we agreed with to get some of the things we need/want faster than we could have gotten them with cash.

      But we still need to focus on paying it off and getting the load off our shoulders. As soon as we’re not having to deal with the banks expecting a chunk of our paycheck each month, we can deal better with emergencies, we can make serious life changes, we can have more freedom to invest / quit our jobs etc.

  8. […] I personally don’t think there’s good debt. At the end of the day you owe money and will lose quite a lot in interest to the lender. Sure, there’s a difference between paying off for a fancy vacation or for your family’s home, but at the end of the month you still HAVE TO PAY MONEY. I was in this situation for 4 years and had some good and some horrible months. I was fortunate enough that my business really picked off speed, otherwise I’d probably be in a deep mess right now. You cannot rely on miracles (or on bad things not to happen), this is why having an emergency fund is really important and there’s still life to be enjoyed, even if you don’t squander your money anymore. […]

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