Good Debt vs Bad Debt – Episode 465

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[00:00] Welcome to the Prosperity Podcast. Prosperity thinkers, today’s topic is good debt versus bad debt. I apologize to the Dave Ramsey fans out there. Your ears are going to be bleeding in just a moment. Let’s get into it. Well, it is so fun to have this conversation and I often will help people think about it in terms of being in debt versus having debt. So good debt is having debt. It’s having a million dollar house with an $800,000 mortgage or a $100,000 house with an $80,000 mortgage, you know, the zeros are not relevant. That is good debt. That is having debt. Buying a business via financing of some sort is having debt. You have a $5 million business, you bought it using debt to get there and that enabled

[00:57] you to have a cash flowing machine. That is good debt is having debt. Being in debt or bad debt is that $100,000 house with a $120,000 mortgage, especially one that is not cash flowing. So we could go down that bunny rabbit trail a little bit and say that you could withstand being in debt. In other words, having higher debt than the value of the asset that’s supporting the debt if the cash flow warranted it, but it’s pretty rare that it does. Furthermore just basic credit card debt you could say is bad debt. Now it’s interesting on our last podcast you brought up credit karma and actually you get dinged for not using your credit cards. Delta and American Express closed one of my credit cards because I hadn’t flown

[01:52] on Delta for a year so I hadn’t bothered to use it and I went to use it and they’re like, oh, we closed it. You were using it. I’m sure I missed an email somewhere, but not helpful. Nevertheless, if you have credit card debt that you weren’t paying on, then that’s being in debt. You’re literally using your future income to finance something. That’s being in debt versus having debt. I would also say that any type of credit card like that is not getting paid reasonably consistently is under the category of bad debt. And again, it’s using your future income to finance something for today. You can get away with it for a little bit. I mean, we’ve all done it. Nevertheless, long-term, you want to focus on good debt or having debt.

[02:42] And I get the question so often around the mortgage in this area, but before we go there, any additional thoughts you’d like to add? You know, there is one piece, actually two pieces to that I want to ask. One is the consideration of the asset and liability. Where does that mix in when you’re looking at good debt, bad debt? Because ultimately, that’s where the conversation tends to go. Well, it is so instructive, really, when you’re looking at the values and just understanding that the capability of an asset, whatever that asset is, it could be a home, it could be a car, it could be a business, it could be, you know, really there’s endless things that are assets to support the debt that is occurring,

[03:30] ideally directly because of the asset. So a mortgage is a good example of that. Putting a plane ticket on a credit card to go to a conference that will benefit your business is a good example of that as well. And I would even go so far as saying that there are items that can be purchased on debt that especially in today’s world are speculative of nature. But if you know what you’re doing, it can be good debt for you versus somebody that is purchasing the same item, but doesn’t know what they’re doing, it could be bad debt for them. So I think there’s an element of knowledge and wisdom that has to be applied to the discussion as well as just the actual monetary figures. Definitely. The wisdom piece is so critical.

[04:21] So the last piece that I wanted to cover before we jumped into your point, I was listening to a business owner recently speak, and he talked about the 2006, seven, eight crisis that we had. And he is a real estate and property investor. He had about $50 million of debt at that time. And he said, I messed up, said I should have had 10 times more debt because they would have treated me different. He goes, because if my balance sheet was at 500 million, those personal bankers, those institutions would have done anything they could, but at 50 million, I didn’t mean enough. That’s a different way of looking at debt. Yep. Well said. And that’s going to bring in all of the camaraderie, the people that

[05:19] think the same way, the community that can build and or support that environment, and he said it, you know, he didn’t have that. And consequently the camaraderie in the community wasn’t there for them, for him. Yes. So we’ve got good debt. We’ve got bad debt. You wanted to talk about mortgages because ultimately that’s where people go. Let’s hear it. Absolutely. Yep. So because it’s such a big actual value, like the debt itself is large, I think people get more focused on that, even though it has what is usually the best interest rate out there. So the, the fact that the interest is deductible is part of what makes mortgage debt good debt. Nevertheless, it’s also very efficient money. It’s a very efficient rate.

[06:07] It’s a very efficient way to handle the asset that is so important in our lives, not just as an asset, but because our homes do create our environment and the culture, if you will, of our family, a home must be looked at, I think, beyond the typical, just factual, personal, financial, numerical environment, and because of that emotion that’s tied up in there, it causes people to not look at the actual numbers, the math, the personal financial information objectively. And so because of the emotion, plus the fact that it’s large, so many people overly focused on wanting to prepay that mortgage or pay off that mortgage. And I just encourage people every day of the week to identify that there is

[07:00] a peace of mind consideration there. And if the peace of mind in the end truly is more important to them than the numerical efficiency, then yes, they can work to pay it off because that’s what is the best peace of mind for them. Nevertheless, I’m going to spend as much time as I can in every way that I can educating them on the pure financial efficiency, because I think once people truly understood it, they would not be so emotionally tied into getting the debt paid off. Instead, they would be emotionally tied into building that emergency opportunity fund, which then gives them the ability to pay off the debt or make payments on the debt, the more appropriate one, along the way. And that’s where the peace of mind should truly come into play.

[07:53] You know, you think about what happened in 2020, there were so many people that needed to move. And so they maybe have spent time prepaying their mortgage, building up this asset in quotes called home equity, and then had to sell quickly or had to sell in an environment that maybe they didn’t want to sell. And their efforts to then free up that home equity could have failed or been delayed, whereas if they just had a liquid emergency opportunity fund stored efficiently, they would be free to go and just go make happen whatever needed to happen in their lives to deal with the working challenge and all that we had to deal with in 2020. So the mortgage, I mean, we have videos on this. I have a book called busting the interest rate lies that goes over

[08:42] the mortgage discussion very thoroughly. You and I’ve done podcasts on it before. I have a one pager. So if somebody’s really curious, let’s make sure they get an email to hello at prosperity thinkers.com our special email for podcast listeners. And I have a one pager that compares essentially a 15 year mortgage to a 30 year mortgage, because a 15 year mortgage is basically prepaying a 30 year mortgage and helps really lay out what the true issues are on that from a conceptual standpoint. And then of course, the book hits it numerically as also. And I think the thing that I would want to leave with our listeners that’s just so, so important is the lack of liquidity that something called home equity has.

[09:26] You know, people think, oh, I can just get a home equity line. Well, maybe, and maybe the bank won’t take it away, but we don’t know those things, which is why it’s so much more valuable to have liquidity in an emergency opportunity fund that we control. Yeah. You mentioned one thing and the liquidity and what is interesting, you know, friends of mine know that I cohost this podcast and I’m not a financial advisor, I’m the cohost of the podcast. So it means I bring my curious mind and I get to ask questions. And what’s really aware is I’ve had multiple friends lately because of the change in the financial markets. They’re coming in, they’re saying, Hey, I’ve heard about this using life insurance thing, and I want to have access to money and these are people

[10:14] that are financially stable, they own businesses, they have access to home equity, but they know that’s going to change, whereas when we have this tool, we have that life insurance piece, we have control over it. And so I think right now you and I are preaching this before the first inning starts, before most people are getting in the game and we fast forward and I don’t know if that’s weeks, months or years, but it will turn around and so that’s why this conversation of good debt versus bad debt and what you’re sharing is so critical, Kim. Well, it’s a joy to do, and I love helping people just step back and look at their personal finances from a slightly more objective standpoint, which obviously anybody outside of the picture can do better than

[11:06] somebody inside of the picture. And then really seek those elements of efficiency that can be brought in sometimes with very simple changes and then understand that, okay, at the end of that, if peace of mind overrides the decision, then awesome, go with the peace of mind, just understand the difference. Wonderful. If you have questions about good debt versus bad debt in your specific situation, as Kim mentioned earlier, send an email to hello at prosperitythinkers.com and that gets on the VIP list for the podcast listeners, it goes directly to Kim and that way you can get your answers directly for your specific situation. So Kim, thank you for sharing this on the podcast today. Always a joy.

[12:00] Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.