Family Finances: Is debt a good thing or a bad thing?
Sometimes debt makes Amanda Gibson feel like a tool, and sometimes she makes it feel like a tool.
Photo by: frankieleon
I’ve been listening to a lot of Dave Ramsey lately. Hearing stories of other people’s financial successes and failures is my way of decompressing between semesters. It’s like Miss Manners, but with money.
Well, if you’ve ever tuned into Ramsey’s radio show for about 10 seconds, you know he hates debt. Like haaaaaates debt. He and debt are like cats and dogs. Like Trump and everybody. Like the entire city of Richmond and snow on day two of a snowstorm. But a whole lot of us have debt, so somebody out there is loving it or at least tolerating it. It makes me wonder–is debt a good thing or a bad thing?
My own experience with debt began with my parents. I grew up hearing stories about how both sets of my grandparents handled money badly. Evidently both couples basically lived paycheck to paycheck, used credit to stay afloat, and were still in debt when they passed. Beginning early in their marriage, my parents were determined to change the cycle. They have always been savers, only borrowing when absolutely necessary. They have paid cash for most of their car purchases. They paid off their mortgage early decades ago. When they applied for their first credit card a few years ago they were initially denied because they had no credit record! These lovely people were able to send my brother and me to college debt-free, AND now they look forward to a comfortable retirement. Well done, parents, well done.
My husband and I have used debt similarly. I’ve written about how much I love my credit cards, which I always, always, ALWAYS pay off in full every month. So the first time I actually borrowed money and paid interest was when we took out our mortgage. The only other debt I’ve had is our current car loan. My husband did come into our marriage with school debt, but we doubled down and paid it off quickly.
So for us, debt has been a positive experience. Without a school loan my husband wouldn’t be in a career he loves. Sure, he could have worked more and completed his degree more slowly and use less Zippa £500 Loans and do it debt-free, but then he would have run the risk of getting sidetracked or burned out. Plus, he was quickly employed, and we were able to pay off the loans in less than two years.
In the process, we paid very little interest and lost out on very little growth the money would have given us had it been invested. Similarly, having a mortgage allowed us to move into a home and build equity beginning in our late twenties. If we had waited until we could afford to buy a home with cash we would have paid years and years of rent. And despite borrowing money in these instances our net worth has steadily grown during our marriage.
But on the other hand, not everyone has a positive experience with debt. Dave Ramsey is open about the fact that going overboard with debt bankrupted him and took a toll on his marriage and family. I know individuals, and I’m sure you do too, who, despite working and paying a mortgage for thirty years, still have a negative net worth. Some folks seem just unable to resist maxing out a credit card if it is available to them. I wonder if my grandparents felt trapped in a cycle of debt. Borrowing can be a slippery slope, and relying too much on future income to finance current spending can mean an insecure existence in retirement.
And the car loan I mentioned above? I don’t love it. We decided to use debt to purchase our current car because paying cash would have put a big dent in our savings. My husband and I are at a point in our lives where spending is up (daycare don’t come cheap), but our income is lower than it will be in a few years (I’m back in grad school). Having a padded savings account helps us sleep at night even if, irrationally, we added another monthly bill. But still, borrowing the cash makes me fear that we can’t really afford it or that our “living high on the hog” will come back to bite us. The practical side of my brain says that we are using debt as a tool to spread out our lumpy income over our working years, but the side of my brain that could use a Xanax says a car loan is a gateway drug to getting in over our heads.
So maybe whether debt is a good thing or bad thing depends on the individual and the circumstances. If you borrowed the first $10,000 you needed to start the business that made you wealthy, your outlook on debt is probably pretty favorable. But if you’re getting calls from collection agencies because you can’t pay your bills because you lost your job you might feel imprisoned by past decisions to borrow. I think I’m somewhere in the middle. I sleep better at night and feel freer when I don’t owe anyone anything. But one of the trade-offs my husband and I have made is to sacrifice a little freedom to smooth out our income over our lives. Only time will tell, but this car loan and our mortgage shouldn’t keep us from sending our kids to college or moving into a fancy shmancy retirement home one day.
How about you? Is debt crushing you or liberating you? Is it a tool or does it just make you feel like a tool?
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Amanda Gibson
Amanda Gibson used to teach folks about money at the Fed. Now she spends her days reading history books, raising kids, and thinking of ways to rule the world.
Notice: Comments that are not conducive to an interesting and thoughtful conversation may be removed at the editor’s discretion.
Of course debt is a very useful tool, which, like all tools, is only useful if used correctly. Otherwise, it’s dangerous. My rule of thumb is that debt should only be used to buy something that will last longer than the debt –a house, hopefully a car, an education, as Amanda said. Car loans and mortgages are so cheap today compared to when I was young; if you have the money to pay cash for a car, you can do better investing the money and taking a car loan. But absolutely the credit cards must be paid off every month. They are just a convenience.