Back to some basics: Good Debts vs Bad Debts

I believe in growing our wealth defense is often more effective than offense.

And a good defensive approach would be not to get too deeply indebted (money or otherwise).

Some people say—follow the Golden Rule—”Don’t get into debt at all.”

I say, “It depends.”

If you read about rich people and how they got there, you would hardly find anyone who did not take on any debt at some time in their career.

Their secret is that they take on good debts  only.gooddebt-baddebt

A good debt  is one where the value of what you bought increases more each year than the interest rate you’re paying.

For most people, the only thing that does that is their house or property—sometimes.  For others, they are Assets that put money in one’s pocket; like businesses, shares in businesses (stocks), and properties that are rented out—more often.

Every other kind of debt is considered a Liability which takes money out of your pocket and gives it to the bank or credit card company.

I mentioned “sometimes”  above because you have to bear in mind that even your own house falls into the category of Liabilities since it does not make you money, but costs you money to maintain instead (property taxes/utility bills/upkeep/repair and renovation).

It only becomes an Asset = Good Debt  in two scenarios:

1) Your property price appreciates over time (more than the mortgage interest payments and those house maintenance payments) and you are able and willing to down-grade to a smaller property when you are older or when the kids are out of the house.  Selling your appreciated house and buying an equally expensive house does not make it an Asset!

2) The current low interest environment provides you a nice tailwind.  If your mortgage rate is the same as the rate of inflation, the bank is basically letting you borrow the money for free.

It’s kind of difficult to explain, but let’s look at an example:

In 2012, I borrowed $100 from the bank at 3%.  In 2013, I will have to pay back $103.  In 2013, I got a 3% cost of living adjustment raise at my job.  The $103 I will pay back to the bank is worth the same as the $100 from 2012.  So I got that money for free.

My example is a bit convoluted, but I hope you get the idea.

In 1996, it DID make sense to pay down mortgage debt quickly as the rate at that time was 9%, while the inflation rate was 3%.  Now the mortgage interest rate is 1.5%, whereas the inflation rate is around 2%.  I think it’s better to lock in the low rates now, if you can.

From the current position, interest rates can hardly go down into negative territory, but they have a lot of room to go up.  And they will.  Just look at where the median interest rates have been in the last 50 years and take the regression to the mean into account.

More tips on how to handle your mortgage

A Bad Debt  will haunt you, if you don’t prioritize your spending to get rid of it as quickly as you are able to.

High interest rate debts (like credit cards debts) are the most haunting ones as you are often charged 24% or more p.a.  Just compare that to the 1.5% on your mortgage.  Or the measly interest rates they pay you for your Fixed Deposits.  And then, stop wondering why the banks reside in such posh offices and why bankers are earning—to put it mildly—above average.

In Bad Debts, the compound interest  is hurting a lot and can make your life a bit unpleasant.

One example to illustrate that point: Credit Card Debt Trap

Let’s say you have a credit card with a balance of $10,000 that you’re making minimum payments on.

The interest rate on your credit card is 24% p.a.

Assuming you DON’T increase the balance of the credit card and you start making minimum payments of 3% of the balance or $50 (whichever is higher), how long do you think it’ll take you to pay it off?

The answer:  19.5 years.   Oh, and the amount you will have to pay back in total would be $17,774 .

What if you just decide to default on that credit card? (We know the bank would send a black ops team to your place if that happens, but let’s just assume shall we?)

If you let that $10,000 balance at 24% sit for a mere 5 years,  it’ll grow to $29,300+.

Now, just because many people have credit card debts  does not mean that you have to follow the herd.  Nor do you have to become a herd-follower when it comes to Education Loans.

In the USA, a full 70% of college students graduated with debt last year, averaging $30,000 in loans.  The fact that most young professionals are living with debt doesn’t make it something you should live with for a long time.

I am not saying you should not invest in your education.  On the contrary, that is actually one of the best investments you can ever make.  Just be cautious with the loans and don’t take a bigger loan than what you really need just because the interest rate appears to be low.  And look at it from different angles.

Imagine that you come from a low-or middle-income household and don’t qualify for scholarships.  Nevertheless, you think it’s reasonable to attend a private college.  Could attending a public college do as well?

Good Debt vs. Bad DebtDon’t spend money you don’t have or the single largest expense you’ll pay in life is interest.  You’ll spend more money on interest than on food/vacations/cars/schools/clothes/dinners out/all forms of entertainment.  You do this because you don’t save enough and demand a lifestyle you can’t afford.   The future owns your income.

If you can’t afford whatever it is, then go without until you can.  Trust me, the short-term benefits won’t be worth the spiraling misery of debt.

Despite the desires and objectives in our lives, I hope you can learn to use money as a tool to achieve your dreams and not let it become a burden in your life.

Treat all debt the way you would treat a loaded gun!

Great advice, but can one really avoid those Bad Debts?

As usual, I like to copy – especially from the age-experienced, who had a head-start on me -, so take a cue from the “debt-free” people and adopt their behaviors.

On a side-note: Don’t get lulled into the belief that just because governments presumably can accumulate endless mountains of debts, you could too.  They have a printing press.  You don’t.


“You can outrun your debts only for a while – sooner or later they catch up with you.” – Milton Friedman

“Only governments can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.” –  Milton Friedman

“Governments never learn. Only people learn.” – Milton Friedman


  1. Some debt can be good debts but can we be sure of servicing the debts at all times?
    What if the stock market or property market heads North?
    What if you lose your job?
    Can you sleep well with all these taken into considerations?
    i think we can’t.

    In our life we got ourselves into debt only when it was interest free or the interest charged was lower than what the bank was paying us.
    This was privilege loans extended to us as employees only.
    If we resigned, we had to pay back immediately the balance of the loan.
    Even such privilege loan we enjoyed at that time, we made provision for some reserved money to cover if we resigned.
    i did resign in one job.
    i did pay back balance immediately.

    Besides accumulating wealth will be so much faster without debt.
    Instead of you paying interest to banks for 10, 20, 30 years.
    How about the banks, insurance coys, stock market, property market paying you.
    We all should aim for this to happen if not now at least not to distant in time.
    i am still aiming because found that retirement spend more not less.
    May have to cut back some spendings lol

    • Hi temperament,
      I agree those would be ideal debts where the interest is lower than what one can earn by lending out or investing money.

      At some juncture of live we have to leverage our future earning power to get what we need (not just want) now. A roof over our heads comes to my mind here. Knowing the difference between good debts and bad debts serves as a good guidance to come to a rational decision.

      Haha. From my own experience spending after retirement does not really drop. That would be a naive illusion. So we have to take this into account for our FI-planning.

      Apologies, temperament, for this late reply. I am having some massive problems with my new computer over the last few days.

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