So Financial Samurai and I (with MoneySmartBook) had a bit of a Twitter discussion about how to use money and Debt. I kept with my standard statement that there is no such thing as good debt, there is only debt (and it is all bad). This is a very old school debt view (but not that old school, since this is pretty much how the previous generation looked at debt), but I stick to my guns on this, that attempting to build wealth while still carrying significant debt is a mistake, and Debt Reduction should happen before significant wealth building exercises.
The concept of Good Debt is sold by Banks, Credit Cards and others who do not want you to feel guilty when you borrow money (it is especially espoused by folks who wish to charge you 10% more than the prime rates), so I think Good Debt is pure marketing hype. It’s like saying you have a Good Cold Sore or possibly a Good Case of Gonorrhea (maybe I am being overly old school debt opinion, but you see my point).
There is Inevitable Debt and that is a Mortgage (possibly Student Loans, if you are paying for education yourself), Inevitable Debt is a necessary evil in your life, because you need it to get the two things you need to live: Shelter and Skills. I realize most of us (me included) cannot put together enough money to buy a house without help from a bank, but calling it “Good Debt” is simply sugar coating a bitter pill. This debt should be (assuming you don’t have other debt), the main thing you should want to pay down as soon as possible (not figure out whether you should pay it down or invest “wisely”).
There was another comment about investing money and making more investing than the amount you might save by paying off debt, but that is a dangerous plan (in my opinion). No matter what you invest in, you cannot be certain you will get the pay back that is promised (did someone say Maddoff), but paying down debt you can see what you will be saving in interest charges, take the sure thing. Would you take your mortgage payment and gamble it in Las Vegas? (if you answer yes, please seek professional help you are way outside the scope of this blog) No, you wouldn’t, so why is it OK, to take possible debt payment funds and gamble it on investments?
I am not saying that there won’t be folks who comment on this saying they easily made more money investing than paying down their Mortgage, I am not contending this may not happen, but any money you invest with, you must be willing to lose (again very old school), and anyone who says otherwise, simply wants your money.
Yes, the model may seem different in the U.S. where your Mortgage Interest payments are deductible, but why does this mean paying off debt is a bad thing? You can show me all the math you want, but at the end of it, if you don’t own the shelter you live in, and are carrying debts into your retirement, why is this a good thing?
Debt Sucks is Old School Debt Thinking
Simple, isn’t it? Don’t just mean it in the derogatory way either, Debt Sucks money out of your pockets, and may well suck the life right out of you. In the middle ages there was a place called Debtors Prison, for those that owed money, I am not saying that was a good idea either, but it is only in the past 30 years where the concept of Good Debt appeared and I think it is a load of crap.
Pay off your debts, then worry about investing later. If you want to live on the edge put money in your RRSP and take the money you get back in taxes and put that on your Mortgage (but I still think paying your mortgage off first is a better way).
Remember, interest rates will not stay at these levels for much longer (I should know, I had a 5 year Mortgage at 11% and thought that was a great rate).