What do Adolf Hitler, Josef Stalin, Osama Bin Laden and Saddam Hussein have in common? Besides, of course, some rockin’ facial hair? Combined, they killed millions of people. They started wars practically on their own. They were generally some pretty bad dudes. In fact, you could even go as far as calling each of them evil.
He’s so good at being evil that they made him a doctor.
Sometimes, certain words are thrown around a little too often. People are inclined to call themselves “nerds” these days, even when describing things that aren’t the least bit nerdy. I’m guilty of saying I “hate” something, when really I should say “mildly disagree” with it. Sometimes this happens because we tend to dabble in hyperbole for comedic effect. Or, we’re just idiots who don’t know the right word for the right situation. You decide.
One example I see of this is with the debt is evil crowd. If you’ve read any amount of financial blogs, you’ve probably heard this mantra at least once. Usually its author has gotten into some sort of hole created by easy access to credit. And while digging out of this hole, expressed their frustration at their debt. Does that make debt evil, or just the author a moron for accepting it?
Banks and credit card companies have never forced someone to take out a loan. Even when the unsolicited offers arrive in the mailbox, the onus is still on you to initiate contact and start the whole process of applying for credit. Even when the card arrives in the mail, you could still cut it up and throw the thing in the trash. But no, you gladly cracked that bad boy out and started spending. Debt is a mistake made solely by the borrower. Is that why you consider it evil?
When used responsibly, debt has the potential to raise your income. Even though I think college isn’t for everyone, the fact remains that college grads make more than high school grads. As long as you don’t piss away your money getting a degree that qualifies you to work at Starbucks, student loans can be a terrific investment in your future.
Say you spend $25k on an education that will improve your earning potential by $10k per year. That investment pays for itself in 2.5 years. Meaning, those student loans are the equivalent of getting a 40% return on that investment for the rest of your life. You’d have to be an absolute moron to call that evil. Millions of young people have been given the opportunity to attend college thanks to student loans. For the most part, these people enjoyed better jobs, higher pay and the increased security that comes with being better educated. Instead of paying for this schooling upfront, they were able to defer the cost, while paying a reasonable interest rate. There’s a reason governments are very generous in their support of student loans.
The same concept applies for the other big ticket purchase everyone finances, real estate. With a traditional mortgage, you buy a house and slowly pay for it over 25 years. What the renters and the pay cash for the house people forget is that, over time, each payment is progressively less, thanks to inflation. My $450 bi-weekly payment is slowly going down, since inflation is slowly eating into the value of that money.
Countless companies have either been saved or grown substantially by using debt. Virtually any real estate related company of any size was grown using debt. McDonalds just about drowned under their debts when they first started taking off in the early 1960s. The same thing happened to Canadian icon Tim Horton’s just a few years later. By using debt in their early years, these companies were able to speed growth and set the groundwork for future success.
It’s pretty easy to figure out whether taking out debt is a good idea. Are you using the debt to buy something that will go up in value? If the answer is yes, then apply for that loan.
I generally have quite the aversion to financing cars. I’ve questioned why having a car payment is just accepted. I don’t care if the car company is letting you borrow the money at a low rate, you’re still paying interest on something that goes down in value. It goes down in value, you pay to operate it and to insure it, and you’re still financing it? Just buy a beater. Believe me, the repair bills won’t be that bad, especially if you just use your car around town.
Debt that finances liabilities should be avoided. It’s never a good idea to pay interest on a trip, or video games, or even a car. But just because you’re stupid enough to do it doesn’t make it evil.