All this week I have been talking about the negative aspects of debt. I believe that by in large, all debt is bad in the hands of the average person. My feelings on this come from the statistics that show both individuals, families, corporations, and governments are largely irresponsible and I will say, destructive with debt.
Don’t believe me? Google “National Debt Clock.” You will see that the national debt is over 10 trillion dollars which averages out to more than $35,000 per United States citizen. More than 3 trillion dollars of our debt is held by foreign investors. Japan and China own most of this. 9% of the federal budget, or $237 billion is spent paying interest. What could our country do with $237 billion? Some would argue that our debt has financed some very worthwhile programs. I would agree but just like in our own lives, shouldn’t the government have money set aside for emergencies? We have emergency oil reserves. Why not money?
Corporate Debt: The Obama Stimulus Plan is proof that corporations have mismanaged their funds. Mortgage backed securities, lending to clearly unqualified people, overleveraging by trying to expand too fast, and simply bad decision after bad decision has produced a federal price tag to be paid back for years to come.
We live in a world where debt is the norm and since I have already spoke extensively about the negative aspects of consumer debt, let me give you two types of debt that although not ideal, are ok. First, student loan debt. Investing in yourself and your marketability is fine. If you have no post high school education, the chances of you living comfortably financially are greatly diminished. Education is the single best investment you can make in your financial future and if you get a marketable degree, you will easily pay off that student loan debt over time. Next, home mortgage debt. Most people aren’t in the position to buy a home in cash. Without a mortgage, very few people will own a home. A home is an investment and there are tax breaks for the interest you pay along with property taxes so although not ideal, home mortgages are a necessary evil.
It should be noted, though, that I do not believe in home equity lines of credit for most situations. The only thing that I feel a little ok with is when you use it to finance home improvements. Other than that, leave your equity in your home so that when you sell, you come away with money for a substantial down payment.
Tomorrow will be the final debt article and I have good news. I’m giving you a raise!