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Debt is one of those things that you will almost certainly have to deal with at one point or another in your life.  And, if you're like most people, it will be something you have to deal with throughout life.  Can you envision debt freedom or are you resigned to having debt?

Mortgages, credit cards, student loans, auto loans, the list of things that can add to your debt, are endless.

Good debt vs. bad debt

I've seen it said where some debt is considered good because it is tied to something that provides positive value.  The two types of debt most commonly associated with this are mortgages and student loans.


A mortgage is tied to an asset that typically appreciates in value over time.  Obviously what happened with housing prices recently is a glaring exception, but for the most part, homes will appreciate in value over time.  So, if you buy a house for $200,000, take out a $160,000 mortgage, the idea is that the house appreciates in value while you pay off the mortgage.  With the numbers I just listed, you would start off with $40,000.

If you make assumptions that your home will appreciate in value 3% per year, and you take out a 15-year mortgage around 3%, then after five years your home will be worth approximately $230,000 and your mortgage balance will be roughly $125,000, giving you equity of $105,000.  So, this ‘debt' payment actually allows you to build positive equity (as well as positive net worth), so it's seen as ‘good' debt.

Student loans

These are seen as ‘good' because the idea is that a degree will allow you higher earning power, eventually offsetting the cost of the loans.  If your degree allows you higher earning power equal to $15,000 per year, and you have loans that (including interest) cost you $75,000 over the life of the loan, your education will theoretically pay for itself over five years.

But is it really good?  The examples I gave are pretty straightforward, and in a perfect world, it would apply in a positive way to everybody.

We've all seen, though, that we don't live in a perfect world.

Housing prices have collapsed.  If you took out a mortgage prior to the housing collapse, you likely saw yourself go into negative equity territory or lose a good chunk of any equity that you might have had.  For newlyweds, this could have been a huge burden.  Nobody wants to start married life like that!

On the student loan side, many graduates are finding that they can't even get jobs, and if they can, they are making less money than people in their fields made even a few years ago.  If you're suddenly making only $5,000 more per year but still have that $75,000 loan, that five year ‘payback' period suddenly turns into fifteen.  Not so ‘good' after all.

In reality, I don't think there is necessarily such a thing as ‘good' debt.  There might be some debt that is more favorable to have than others, but even the ‘good' debts can turn bad in a heartbeat if things somehow go south.

Leveraging Debt For Income

One other argument for carrying debt lately has been to use the record low interest rates that we now have as a method to leverage against investments that can pay at a greater return.

If you have money to pay off your house, some will argue that you should take the 3% mortgage you can obtain, and use the cash to invest in the stock market.  If you've done that over the last couple of years, chances are this strategy worked out very handsomely.

As long as you can see an investment income higher than 3%, you're coming out ahead.

But, again, there is risk involved.  Say the investment you choose goes down 20%.  Suddenly that 3% ‘return' on paying off your debt looks a lot better than it did when you thought you were going to gain 20%.  As long as you understand that there is risk, there's nothing ‘wrong' with this strategy.  Especially if your investments go up!

The Psychological Component

From a dollars and cents standpoint, having debt offers a great deal of uncertainty.   This can all be managed according to your level of risk, and the tools you use to manage your debt.

However, one component that many don't take into account is the feelings associated with debt.  Being in debt can drive some people crazy.  For others, it's no big deal.

Believe it or not, there is a cost involved here, and it goes beyond the interest rate or the dollars and cents involved.

If you have anxiety about your debt every time you open a bill, there is a cost to you.  This anxiety could be costing you health, as your blood pressure could be going up, you could be losing sleep if you wake up thinking about your bills, or if you get stuck staying in a job that you might otherwise leave but for the fact that the paycheck is needed to keep the bills paid.

Don't discount the importance of these things.

If these things don't bother you at all, then you're likely OK with keeping some level of debt.  However, if the things I just mentioned drive you crazy, then add that into the ‘cost' of your debt.  Then, the true cost of having debt may work out differently.

What if you had no debt?

On the same level, some people may not have anxiety about debt per se.  Still, they can envision happiness and relief when thinking about not having any debt.  This is your first insight to what debt freedom could look like.

Think about it.  If you have debt today, picture what your life would be if you had no debt payments?  No mortgage.  Zero credit card debt.  No auto loans.  No more student loans.

For me, I picture a weight being lifted off of my shoulders.

If you have similar visions, then there's a sense of urgency that's important to address.  Getting out of debt takes away a burden.  A burden that you might not even know you have!

In either case, whether debt is dragging you down or whether you can envision debt freedom, there's good news. Every little bit you can do will help you in the long run.