Over the years I’ve read a lot of books about personal finance, business, and investing, and many of them have one thing in common: They encourage you to use debt to leverage the little money you have in order to make more. They call this good debt .
You’ve seen those not annoying at all guys on TV exclaiming, “Buy real estate with no money down”, “Use other people’s money to invest your way to riches”, and so forth.
On the face of it, it sounds really appealing. I mean why wouldn’t you want to use somebody else’s money to make money for yourself? Sounds like a slam dunk, right? Some of these people will even try to convince you that it’s low risk or even risk free. They even use the term good debt because if you use it right, they say, it will make you richer.
What is Good Debt?
So what is good debt? Good debt is considered to be any kind of debt that will help you to get a return on investment that's greater than the cost of using borrowed money. Some examples of so called “good debt” are:
- College Debt- It costs a lot of money to go to college, but when you graduate, the theory is you’ll make a better living than you otherwise would have and will be able to pay off the loan. But that doesn’t always happen, especially in today’s environment.
- House Debt- A house is supposed to appreciate in value over time, thus making the investment worthwhile. Again, as we saw a few years ago, that doesn’t always happen.
- Business Debt- Investing in your business is supposed to be able to get you a return in investment that will put your business in a position to make more money, thus giving you the ability to pay off the loan as your business increases. However, sometimes the business doesn’t see an increase, but the loan still has to be paid.
- Investing Debt- Borrowing money to invest in the stock market, real estate, etc. in order to get a return that is greater than you would otherwise get. Probably the most risky of all, because when investments go south, they tend to go way south, but the loan still has to be paid.
So what does this good debt accomplish? Well, it may help you leverage that borrowed money into a profit when everything goes according to plan. But plans don’t always work out the way you want them to.
But instead of talking about what good debt may do, let’s talk about what it will always do.
Good Debt is Still Bondage
First, even “good debt” will always put you into bondage. As the scripture says, “the borrower is slave to the lender.” Every time you borrow, you give up some of your freedom, and the more you borrow, the less freedom you have.
Second, it will always increase your risk. Because everything has to go according to plan for good debt to get a return on investment. Sometimes that happens, but sometimes it doesn’t too. Life happens, jobs go away, home values go down, and businesses go bust.
Third, you always pay more than you would have if you would have just used cash as your tool of choice. Interest and fees add up, and that puts you at a disadvantage because you end up paying substantially more for things bought with borrowed money.
What the Bible Says About Debt
Of course, most of us know the Bible has a few things to say about borrowed money, such as:
“The borrower is slave to the lender.”– Proverbs 22:7
“It is better not to vow than to vow and not pay.”– Ecclesiastes 5:5
“If you lack the means to pay, your very bed will be snatched from under you”– Proverbs 22:26-27
The Bible doesn’t say that taking on debt is sinful behavior, but it does warn us that there are certain truths that go along with debt that are unavoidable, forcing us to recognize that debt is not the best use of what God has provided us with and that using it doesn’t always work out like we plan.
Like the recent grad with $50,000 in student loan debt that finds out her degree won’t make her enough to comfortably pay off the loan, so she’s stuck struggling to pay it off for decades while life continues to happen.
How about the business owner that borrowed money to keep his business afloat, only to find out that his market has dried up?
Or the investor that had a plan to leverage borrowed money to make a greater gain on the investment than the money is costing him, only to find the stock market, real estate market, or whatever he’s invested in has tanked.
These “good debts” come with a lot more risk than many people realize and when they blow up in your face, they end up causing a lot of destruction.
Paying Cash is Better
Debt can be used as a tool to gain wealth, but all too frequently the use of that tool results in a jagged edge that cuts the wrong way. However, when you use cash as your tool of choice instead of debt, you find that cash is always a tool with a much finer edge that allows you to accomplish your financial goals with much more freedom and much less risk that will achieve much more sustainable wealth in the long run.
Yes, I know not everybody is going to get that there is no such thing as “good debt”, but if you do get it and you start to practice the art of eliminating debt and using cash instead, you will always succeed in a much greater way, guaranteed.
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