Consuming your way to bad debt – Financial Facts

Consuming your way to bad debt

We coined the term bad debt to refer to debt incurred for consumption, because such debt is harmful to your long-term financial health. (We used this term back in the early 1990s when the first edition of this book was published, and we’re flattered that others have since used the same terminology.) You’ll be able to take many more vacations during your lifetime if you save the cash in advance.

If you get into the habit of borrowing and paying all the associated interest for vacations, cars, clothing, and other consumer items, you’ll spend more of your future income paying back the debt and interest, leaving you with less money for your other goals. The relatively high interest rates that banks and other lenders charge for bad (consumer) debt is one of the reasons you’re less able to save money when using such debt. Not only does money borrowed through credit cards, auto loans, and other types of consumer loans carry a relatively high interest rate, but it also isn’t tax-deductible.

We’re not saying that you should never borrow money and that all debt is bad. Good debt, such as that used to buy real estate and small businesses, is generally available at lower interest rates than bad debt and is usually tax-deductible. If well managed, these investments may also increase in value. Borrowing to pay for educational expenses can also make sense.

Education is generally a good long-term investment because it can increase your earning potential. And the interest on student loans generally is tax-deductible deductible (see Chapter 7). Taking out good debt, however, should be done in proper moderation and for acquiring quality assets. See the section later in this chapter, “Assessing good debt: Can you get too much?”

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