IS ALL PERSONAL DEBT BAD?
Let me reframe this…when “fitness gurus” tell people that 'carbs are the enemy'…what do you think to yourself?
Now as a general rule, do people get fat from with pizza, pasta & desserts?…absolutely!
When it comes to personal debt…the general rule of thumb is similar…people abuse or misuse credit cards which leads to high interest debt…which is REALLY BAD and can snowball quickly!
So the general message to the public of… “avoid personal debt” and “avoid carbs” is meant to be helpful. However, as fitness experts you see the issue with that broad statement.
It is the same for personal debts…they are NOT all created equally.
Some examples of “bad” debt are auto loans and credit cards. Both work against your financial goals in two ways:
The interest payments can drastically increase the cost of the item purchased
The interest is NOT tax deductible
CAN THERE BE GOOD PERSONAL DEBT?
In my opinion, yes...you can sometimes use personal debt to your advantage.
Below are 2 examples that I think are popular.
Personal Real Estate
Student Loans
Advantages & disadvantages will vary so I won’t discuss that. Instead, I will focus on already having one of these types of debt...and what to consider when paying it down.
The debt’s impact on your financial goals will vary based on your income tax situation.
MORTGAGE DEBT:
In 2019, the mortgage interest deduction is capped at loans of $750,000.
STUDENT LOAN DEBT:
For student loans, the interest deduction phases out completely over $90,000 (single) and $170,000 (married).
WHAT DO THOSE LIMITS MEAN?…(POTENTIAL TAX SAVINGS)
Your current interest that you are paying could be partially offsetting taxable income…that would be a benefit. If that is the case, there might be strategies to consider to pay the debt over time and…then use the difference in your monthly budget to invest in your retirement/child’s education/other financial goal.
CONCLUSION:
Just like 1 donut won’t ruin your whole diet…some personal debt might not be hurting you as much as you think
Evaluate the impact of the interest you are paying and compare that to what you would do with the money.
Ex: Credit card with 18% interest rate vs save for retirement…the stock market does NOT average 18% so it's a no brainer to pay down that credit card with all your excess budget dollars.
Ex: You have a student loan with a rate of 3%, and you are married with $125,000 of joint income…that loan interest has a tax benefit so you could consider using the spare dollars into saving for a home/retirement/college tuition for child.
Best
Pat
(Disclaimer: This is meant to be educational and not advice for your personal situation. Please consult a Financial professional before making changes to your debt management strategy.)