Debt is a tool.
As previously discussed in the post about Debt and Income, debt is not inherently a bad thing. Debt is a tool. This is such a complex topic so let’s talk about it some more!
It is a tool for value and wealth generation from both the person who borrows and the person who lends.
Value
Does debt generate value immediately, long term, or not at all?
To consider Good vs. Bad debt, we have to first discuss value.
But it bears the important question that most people do not intentionally consider:
What does value mean?
Now in simple terms, value can be defined as:
- Monetary price or cost
- Individual principles held by one person or declared by their own judgement
- Something of importance or “worth it”
Value is a complicated word.
Monetary prices can change based on the market – the cost of an item, such as a car, education, home, or the interest rates and fees related to these loans, constantly change.
Individual principles and judgement also constantly change – it depends on your current lifestyle, your physical, emotional, and psychosocial needs, as well as the current state of being.
Something being “worth it” is individual. It is a choice by the individual knowing everything they currently know about themselves.
(For more reading on something like this I recommend reading up on Abraham Mazlow’s hierarchy of needs, Erik Erikson’s eight stages of development, or Carl Rogers’ self-actualization theory (these are a little bit dense of readings so be prepared if you try to read them! Can you tell I’m a Registered Nurse with a Master’s degree and a Bachelor’s prepared Biomedical Scientist? Haha!))
Plan
Is there a specific plan for debt?
Back to the idea of intention. What is intended – the aim or plan of what was done – and what actually happens often varies wildly because of execution. Having a weak intention with regards to a decision about debt can often make debt last longer and generate less value, regardless of the amount of time you may have.
We can counter this by having a true, strong intention about our debt. Why do we want it?
There are three questions I often ask myself when it comes to debt.
- Beneficial to my life and I absolutely need it?
- Can it wait to save the cost of the item?
- Is it realistic to wait?
As serious as these questions may be, it can be beneficial to those who have trouble with impulse purchasing to think in the same way. Allow yourself a set period of time to wait prior to purchasing the thing you really want. If the need goes away, you can either wait to save for it if it is realistic to do so, or you have saved the money not spent on the impulse! This is a hard skill to learn! It’s a muscle to build and takes practice!
Time
Can you pay the debt off quickly?
When individuals think of time and money, there are three things that come to mind:
- Personal time vs. obligation time.
- Years or hours of work it takes to pay for something
- Interest payments
Time and Money are a balancing act on a scale
Personal experience has pushed my values towards time more than money. Therefore, on the scale of how much time does this thing cost. I look for the scale to slide more towards the money cost than the time cost. This can vary from person to person.
This allows for personal time – aka the time to spend on things we choose over obligatory time – things we spend on things that are obligations to others or choices made in the past. In the choice of good versus bad debt, it must be considered whether money or time is more valuable.
Good Debt vs. Bad Debt
When people think of debt, often the category of debt often includes the big three:
- Student Loans
- Mortgages
- Credit Cards
- Car Loans
Not everyone has all of these types of debt, but these are the common ones. So these are the ones used for examples below. It highlights benefits and drawbacks of each type of common big debt categories.
Student loans
Does the subject of study open doors to new thinking, jobs, or life choices? If it is possible to pay the cost of student loans with these assets? How does the power of education influence a person’s future?
Does traditional education in the form of a certification from a University have to be the route you take? Some other examples include:
- Can you take a vocational training program?
- Generate value from an online web course?
- Can you create something on your own (art, books, online website, sellable item?)
- Get certifications in your career: Scrum, Agile, Waterfall, Google Certs, Web development, Project Management, Critical Care Registered Nurse (etc.)
Education is not limited to formalized education. The cost of student debt is the cost of organized education with like-minded individuals. Essentially, the service being paid for is having education all in one place at University. The value of student debt is the knowledge, references, people met, skill-set, ability to learn on your own, personal momentum and drive you develop from it. The true value is how well you take the experience of learning and put it to use.
Mortgages
A home can be anywhere you live. It can be an apartment, a condominium, a timeshare, a shack, a car, or a mortgaged lot with a house on it. For purposes here, the discussion pertains to an owned plot of land with a house on it.
A home is one of the biggest purchases people often make. It requires a sizable down payment and financial savvy knowledge about interest rates, amortization schedules, credit scores, risk profile and management, among many other financial welfare pieces which all come together.
A home is usually an appreciating asset. An asset is something that has monetary value and appreciating asset means it gains (goes up) in value. When people buy a house, they anticipate it being an investment on top of a purchase. The cost of the home and the land tend to go up, appreciating in value, and allowing for other financial decisions as they move forward in life.
An additional benefit to a home is the benefit of having a place to live. This might seem counterintuitive but its an amazing feeling to have a your own space which you can design and to which you can take charge. It can be liberating for some and extremely taxing for others.
A caveat to home ownership is the huge barrier to entry. Most conventional mortgages require a downpayment of 20% of the cost of the home (though there are numerous exceptions and programs that circumvent the rules for first time buyers in particular) plus mortgage and lending fees. These fees are different at any financial institution so be sure you are getting the best deal!
There are significantly more benefits and drawbacks to Mortgages, but most people who enter into them tend to have an appreciating asset over time which becomes theirs and is a place they can completely manage themselves.
Credit Cards
Value from a credit card comes in the form of a credit history, card rewards, and the ability to not have to take a loan for short term unplanned expenses.
Unplanned expenses means Emergency Expenses. Not impulse purchases.
Unfortunately, the credit score and credit awarding system is designed to perpetuate credit lending to individuals who are reliable interest payers and not reliable low risk borrowers.
If a lender earns money on interest, would it be better for them to lend $10,000 dollars at 20% interest to someone with a 770 credit score or a 830 credit score? It really depends on credit history – if someone is a reliable payer of their loans but always carries a higher balance (e.g. higher debt utilization and therefore lower score like 770) they are reliable money generators for the lender. The 820 credit score may have excellent payment history but carries next to no debt from month to month and therefore would generate lower interest historically. A lender may see this as a lower potential income loan and potentially lend less.
To be clear, I am not advocating for lower credit scores. I am advocating for understanding who is in charge of evaluating these scores and their goals. If you understand you can be a smarter debt user and consumer!
As examples of credit card uses and value:
Using a credit card to buy a new washer and dryer because the old one broke and you are waiting on your transfer from your emergency fund account – is a very acceptable use of a credit card.
However, most individuals tend to use credit cards differently. They consider the card rewards as justification of impulse purchases (I have done this as well in the past myself.) The rewards programs exist in the first place to incentivize spending and interest payments!
If you found something that you absolutely must have (hopefully you’ve given it at least 24 hours to really stick with you before you buy it) the only way to generate rewards and not interest is to already have the money to pay for the item you are purchasing and to pay the card off the moment you purchase it. This accrues the points without accruing the interest.
Oftentimes, it is best to use these cards on recurring charges such as utilities, phone payments, or other such reliable costs and set up an automatic transfer from your bank account to your credit card. This allows point generation without the risk of interest payments and are already expenses which are more reliable and possibly required for your day to day life.
As a big disclaimer! Interest rates on these are significant, commonly above 20%, and often the monetary value of any points or benefits you may earn based on dollars spent are destroyed and counteracted if you pay even one month worth of interest payments. By holding a balance month to month, any rewards from the card are often overshadowed by the interest paid per month.
Cars
Having a car for transportation may create value to allow you to get to where you need to go reliably. The value created is reliability, convenience, and time.
Buying a Lamborghini (which roughly starts at $250,000 in 2025) when it is difficult to afford a house payment and groceries, may be diminishing the value instead.
In this sense, having a car can add value, but the right car will have the biggest impact.
It is important to note that cars are often depreciating assets – they lose value more than they often gain once they are purchased. This means the cost of the car will often never be reclaimed as money once purchased.
In conclusion
Debt is a tool.
A tool is not inherently good or bad. It is the values, plans, and time investment which will categorize it.
So my question to you is simply thus:
Do you know your values, have a plan, and take time into account when you think of debt?
If you didn’t before, hopefully you will now 🙂
From my mind to yours!
~Jay
I enjoy sharing what I have learned through my own personal finance journey!
