Debt. For many, the word alone triggers feelings of anxiety, stress, and regret. And with U.S. household debt hitting an all-time high in 2024, it’s easy to see why. According to recent data, total household debt has surged past $17 trillion, with the average American family carrying sizable balances across mortgages, auto loans, student loans, and credit cards. However, not all debt is created equal. The key lies in distinguishing between good debt and bad debt and learning the perspectives on how and when to adopt debt as a tool for personal growth, stability, and well-being.
Debt, in essence, is a financial tool that allows us to leverage future income to meet our current needs or desires. But the way we choose to use debt can make all the difference. Good debt is an investment in our future, helping us to build assets, improve our quality of life, and enhance our ability to contribute to society. On the other hand, bad debt tends to drain our resources without providing lasting benefits, often leading to financial stress and hardship.
A mortgage, for instance, is a prime example of good debt. Owning a home is more than just a financial investment; it’s an investment in our family and community. A home is where we raise our children, create memories, and build a foundation for our future. The decision to take on a mortgage should be seen as a positive step toward securing a stable and fulfilling life. Of course, outrageous borrowing for an overly expensive house, simply to keep up with societal pressures or to keep up with the Cohens, can quickly turn this good debt into a financial burden.
Similarly, auto loans can be considered good debt when they enable us to commute to work, earn a living, and expand our relationships. A reliable car is often a necessity, not a luxury. However, the same auto loan can become terrible debt if used to purchase a lavish, unnecessary vehicle that far exceeds one’s needs and budget. In such cases, the debt adds stress rather than value, becoming a symbol of excess rather than a tool for progress.
[Trigger alert:] Education is another area where debt can be both a powerful enabler and a potential pitfall. Student loans represent an investment in future earning potential and personal growth. The key is to approach this debt with a clear vision – choosing a field of study that aligns with one’s skills and passions and offers a realistic return on that educational investment. Choosing an affordable institution and pursuing a profession that aligns with one’s strengths and aspirations can be a wise use of debt. However, attending an expensive (or prestigious) college only to pursue a career that could have been attained with a more affordable degree (or none at all) can lead to years of financial hardship without corresponding benefits.
While good debt can be a powerful tool, bad debt is a trap that many fall into all too easily. Credit card debt, for example, is often (but not always) the result of impulsive spending on fleeting pleasures or unnecessary luxuries. Unlike strategic leverage, credit card debt usually comes with high interest rates and offers little to no return on investment. It’s the kind of debt that can quickly spiral out of control, leading to financial instability and stress.
Reckless spending on things that don’t provide long-term value – whether it’s the latest tech gadget, extravagant dining, or designer clothes – can lead to a cycle of debt that is difficult to break. The key is to distinguish between needs and wants and to use debt in a way that aligns with our long-term goals and values.
Understanding the difference between good and bad debt is the first step toward managing our finances wisely. Before taking on any debt, assess your needs and priorities. Is this expense essential? Will it improve your quality of life or contribute to your future success? If the answer is yes, consider it carefully and proceed with caution. Create a budget that allocates resources for both paying down existing debt and saving for future needs. Avoid the temptation to overspend on non-essentials.
Take the time to understand the terms and conditions of any loan you’re considering. Be aware of interest rates, repayment schedules, and any penalties for late payments. Consult a trusted advisor or mentor if you need help managing your debt. They can help you create a plan that aligns with your short-term and long-term financial goals.
Here is a piece of advice I recommend to some of my coaching clients: Recognize the positive role that expenditures play in your life. Instead of viewing debt, or even expenses, as a burden, see it as a mechanism that can help you achieve your dreams and contribute to your well-being. In that regard, spending on events like vacations or other forms of enjoyment can be uplifting if approached with the right mindset. These experiences allow us to recharge and reconnect with loved ones. When undertaken thoughtfully, such spending can enhance our overall well-being, making us more productive and balanced individuals.
In today’s world, debt is a reality that most of us must face. But rather than viewing it as a necessary evil, we should strive to understand its nuance. By embracing debt as a tool for growth and opportunity, we can approach our financial obligations with a sense of gratitude rather than fear. When used appropriately, debt can help us build the lives we want – lives filled with purpose, stability, and the capacity to help others.
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Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
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