Three Views on Debt

Debt Is Evil

The first debt philosophy is the most straightforward – All Debt Is Bad. This group tends to view anything in the red as unnecessary and irresponsible. Avoiding debt at all costs is an essential part of the ‘Debt is Evil’ financial philosophy. They will cite stats about the crazy levels of debt in our country, but do they have the whole picture?

The obvious advantage of this line of thinking is that a person with no debt, even with a small net worth, is safe from some of the more extreme financial hardships like foreclosure and collections. You are free to do what you want because you don’t have a financial obligation to cover. All of your money is your own.

The disadvantage of seeing all debt as bad is that one can focus so much on delayed gratification that you strip joy out of the present. Saving 100% for college or a home may seem noble but if it inhibits the possibility of getting a better job sooner or keeping children in a good neighborhood, is that diligence worth the present cost? There are times where saying yes to an opportunity means taking on debt. Those in this mindset can often be very critical of the debt of others, which can put a real strain on their relationships.

How Could You Take Out That Car Loan?!

Debt as Necessity

In the western world and particularly the United States, many people fall into the mindset that debt is a necessity. This group believes that our economy has developed because of debt and going into debt is part of being an adult. Car payments, mortgages, student loans, credit cards – they’re all cogs in the economic machine and in most cases impossible to avoid.

The advantage of seeing debt as a necessity is that you don’t spend all of your time living in the future. It’s important to enjoy the present and those who are always avoiding debt often forget that occasionally loosening your purse strings a little can be energizing and good for relationships. This group also isn’t likely to criticize others around them for going into debt.

The disadvantages are abundant. Assuming that debt is part of life will push people that subscribe to this idea to buy things they can’t afford. This group sees their geographical or economic status as entitling them to a certain level of material perks such as a nice car (perhaps new), owning a house, a college education and nice Christmas and birthday presents. None of these things are wrong, but when you believe that going into debt to get them is part of life, you don’t push yourself to save responsibly, live below your means and prepare yourself for a more stable future.

The other disadvantage of seeing debt as necessity is that you might defeat yourself before you try. A defeated attitude that says “I’m going to have to take out a loan so what’s the point in even saving a 20% down payment for a house?” will get you into really dangerous financial commitments.

Debt as Leverage

The final school of thought relating to debt are those who see debt as leverage. Not all debt is created equal and while some debt like high interest credit cards or auto loans should be avoided, other debt like a mortgage student loan or business loan can be used to advance your future and your finances.

The advantage to this type of thinking is that it doesn’t look at financial systems as black and white. Those with this mindset enter every financial decision by reviewing the pros and cons, understanding what’s affordable and what isn’t and considering what the return on investment will be. This group might also be more open minded to the financial decisions of others because they understand that a financial trajectory is largely determined by a balance of risk and preparation. No one decision can determine someone’s financial savvy rather it’s how one weighs a financial decision against their long term goals that determines whether they’re making the right choice.

The potential disadvantages to this group is when the scale is out of balance, in which case you may share the same disadvantages as the former groups. If you start to lean too far to the risk taking side you may use the excuse that not all debt is bad with four or five different types of debt at one time – ignoring the importance of balance on the debt versus stability scale.

What is your view of debt? Do you avoid it, embrace it, or use it as leverage? Start a conversation below.

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