A: It might be . . .
There are lots of opinions about debt. Some think it’s a great way to borrow your way to becoming rich (Robert Kyoski) and some are really super-negative about it (Dave Ramsey). I’m pretty much in the Dave Ramsey camp but maybe we should back up and take a fresh look because I think it’s a good question.
Is there such a thing as good debt? I think that’s actually the wrong question. Debt, by itself, isn’t really good or bad – it’s not even human. . . Let’s back up even further, and see what the Bible has to say about debt.
I am not a Bible scholar, but I have read the entire Bible and don’t believe the Bible explicitly forbids debt; therefore I don’t think it is inherently wrong/sinful (not a salvation issue); however, the Bible does have a lot to say about debt. Specifically it warns against going into debt and has some pretty harsh words for those who borrow and don’t pay back.
The rich rules over the poor, and the borrower is servant to the lender
the wicked borrows but doesn’t pay back, but the righteous is generous and gives
Let’s ask a different question, is it a smart idea to go into debt?
A: probably not. Let’s start specifically with an example of when I think debt is an especially bad idea. I do not recommend going into debt for a depreciating asset. We covered that in a recent post about cars (see link below).
I think mathematically this inherently decreases your net worth – that’s bad. . .
I think it’s also a bad idea to co-sign for someone else’s debt. Co-signing (or surety) is a formal commitment to guaranty someone else’s debt. Essentially you are going into debt with (and for) someone else – someone the bank considers to be a risky investment (otherwise they wouldn’t need someone to co-sign). You’re probably not smarter than the bank. . .
it’s a dangerous thing to guarantee payment for someone’s debts. Don’t do it!
Q: is there ever a situation when it is “acceptable” to go into debt?
I will start with an example. I would prefer that everyone save up and pay cash for a house – but that’s probably not realistic – especially in certain housing markets. I am personally comfortable with a 15-year mortgage on a house – especially if someone has a reasonable down-payment. why? because houses tend to appreciate – at least at the rate of inflation and because housing is something everyone needs. Plus, you can save a tremendous amount of interest on a 15-year mortgage vs. a traditional 30-year mortgage. Additionally, there is a significant tax advantage to purchasing a home (vs. renting). I believe purchasing a home is a better “deal” (vs. renting), as long as you plan to live in your house for at least 5 years – otherwise, you are probably better off renting.
Now that we have established what is a really bad idea – going into debt for depreciating assets or to guarantee another’s debt, and an acceptable situation – a 15-year mortgage for a house – what about going into debt as an “investment”?
After all, I believe this is essentially Robert Kiyosaki’s advice – use debt to buy investment real estate and get rich. . . Mathematically, I won’t argue with the power of leverage – certainly some businesses (as well as some individuals) have made this wager and consequently made a handsome profit in the process. Some rich people, the argument goes, have made this strategy work; therefore, so should you. I will concede that some have made it big as a result of leveraging debt; however, just because someone else did it, doesn’t make it a smart, or even moral, strategy – for all to follow.
Sure some businesses (and some individuals) have used debt to get rich. Mr. Kiyosaki advocates using this leverage model in real estate. I presume the fall back position, if the real estate market turns south, is you can always declare bankruptcy – that may be legal, but I would argue it’s clearly wrong to not pay back your debts – I think the Bible is pretty clear about that. Also, this strategy, assumes you know what the future holds – for example, that real estate prices won’t collapse, or that your rental investment won’t require significant repairs, etc. Let’s see what the Bible says about the future.
Come now, you who say, “Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit”— yet you do not know what tomorrow will bring. What is your life? For you are a mist that appears for a little time and then vanishes. Instead you ought to say, “If the Lord wills, we will live and do this or that.” As it is, you boast in your arrogance. All such boasting is evil.
Having said that – the risk is just too high for me to recommend this strategy (borrowing your way to becoming rich); I would rather you pay-off your existing debts – starting with consumer debt first (e.g., credit cards) and mortgage debt last (typically appreciating assets). I’m not afraid of money but I think a healthy level of respect for debt is definetely warranted (common sense in my book).
I do agree with Mr. Kiyosaki that you should get educated (financially speaking); attend a financial peace university class near you. I also agree that some rich people take advantage of the poor. The Bible has some pretty harsh words for those (i.e., the rich) who oppress the poor (proverbs 22:16, proverbs 14:31)
At least think about it. . .