Is There Any Such Thing as Good Debt?

The struggle with debt permeates our culture.  In the process of sorting through the negatives of debt, it is possible to draw a somewhat hasty conclusion that all debt is bad, and counterproductive.  Of course this is not true.  There is a productive use of debt by individuals, businesses, and even charities.

 To understand we must define productive and non-productive debt.

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If I borrow money to buy an experience that I cannot pay for, and incur debt with a carrying cost, I have burdened myself with non-productive debt. 

 If I borrow money to acquire an income stream that will service the debt utilized to make the acquisition, as in buying an office building with a triple AAA credit tenant, I have made a productive use of debt.

 If I borrow money on my margin account to buy the "latest" hot stock that has not really established its value, I likely as not, have saddled myself with dangerous debt and non-productive debt.  In essence, I can lose the money and still owe the debt.

 If I borrow money to make a home purchase, and enjoy the benefits afforded by the IRC for homeowners, and I plan to stay in the home for at least three to five years, I will probably at least break even, recover my down payment, and may even save some taxes in the process.

 If I borrow money to purchase a new automobile, and owe more than 90% of its value, I am immediately upside down on the use of debt if the car is totaled or stolen.  We truly love our automobiles, but the amount of debt we are willing to burden ourselves with in this area boggles the mind.

 If I borrow money to fund my IRA, or Pension contribution the first week of the new year, and therefore adjust my w-4 to have less taxes with held, and utilize my tax savings and my earnings to repay the loan as soon as possible, normally in the first quarter, I have made borrowing work for me.  In essence, if I have borrowed in a deductible fashion from an equity line of credit, I have managed to make my tax deductible deposit early, it compounds tax deferred, and I receive a deduction for the interest payments to repay the loan in the first quarter of the year.

 Borrowing can be a productive, wealth enhancing activity, or it can be a "slave to the lender" type of experience.  A wise steward utilizes debt as a tool to build wealth, obtain favorable tax treatment, and expand the assets under management.  A poor steward most frequently thinks of debt as a tool to acquire something he or she has not had the discipline to save for, nor the patience to wait for.

 Not all debt is counter-productive.  Sound financial practice requires the benefits produced by the debt to service the debt, and repay the original capital.  When we apply these principles to business or ministry, the result is the same.  The cash flow created by the application of the proceeds of the loan must provide an expanded flow of income able to service the credit requirements plus repay the original loan.

 I had an old mentor who always cautioned that you were not in debt, if you could sell the asset in a fire sale, at a discount, and still cover all the obligation.  Anything more than this wouldn't allow him to sleep well at night.  He at the time owed tens of millions of dollars, and slept very well.

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