Welcome to our third installment of Money Myths! The last two editions discussed the money and happiness, and real estate as an investment. Today I would like to talk about debt. Debt is looked always looked at negatively, no matter what kind of debt, the central belief is that if you have any then you are financially irresponsible. Today’s money myth is that all debt is bad debt, and that is simply not a true statement.
I know this may be the most surprising of all five editions, as I am about to explain why there are certain types of debt that are perfectly acceptable. I’m not here to advocate that you should carry credit card debt, most types of consumer debt carry high interest rates and are extremely volatile for your finances. A type of debt I wouldn’t feel overwhelmed by is student loan debt. In fact, I have this very type of debt right now and I am still working on paying it down. The interest rates on this type of debt are very low, and the investment was vital to furthering my career. Now I don’t think you should go into a $100,000 worth of debt to get a degree in literary arts, or if you plan on being a stay-at-home parent in a few years, but if it’s an investment for a lifelong career then I think it is money well spent…or borrowed in this case. I have about 6 years left in my 10 year repayment plan, and I have paid some interest to boot, but this interest is tax deductible. So now we have debt as an investment that is also tax deductible, this is not your run of the mill debt.
Another form of debt that I consider to be non-volatile is a home mortgage. I know this seems contradictory to my previous article debunking real estate as an investment but I never said that owning a home was the worst think you could do. If you want to buy a house and live there for the rest of your life than I think it is perfectly acceptable. With rates hovering around 3.5% you can borrow money at a rate much less than you can find as a return on many investments. It just makes more sense to borrow at a rate this low and then put your cashflow in a dividend paying stock that returns a higher rate…and believe me, they are out there. Also, like student loan debt, mortgage interest is tax deductible. This is the primary reason I receive a tax refund each year.
I hope you enjoyed this edition of debunking common money myths, and I hope to see you back for our next edition.