Not all Debt is Bad

The biggest Boomer myth is: all debt is bad, debt is evil. I'll tell you from my own experience, not all debt is bad. I categorize debt into three main categories.

Bad debt: anything that you have to pay 10% interest on is a bad debt. You should pay it off as soon as possible, and typically these are credit cards or super high personal loans, like, you know, 'buy now, pay later' kind of things.

Anything that's 5 to 10% loan interest rate, that's not a bad debt, especially if you use it for, say, studies, upgrading your skills, buying an asset that appreciates, and so forth. A car loan at 7% may be not so great, but a home loan at 6-7%, if it makes sense for you, absolutely no harm in that. Homes appreciate over time.

Now, any loan that is below 5%, that's a third category. That loan is actually not bad. I never rushed into paying off those loans early. I always paid those loans at the end of their maturation. Why? Because you can take the money that you're going to use to pay off that loan, invest that money in a cheap index fund, low-cost index fund like S&P 500, FX, or a VUG, something like that, and your money can grow 10% or more per year. Then why would you pay off a loan that is less than 5% a year? It makes absolutely no sense.

So, debt is not evil. 10% or more interest rate debt is bad; pay it off. 5 to 10%, use good judgment. I think you can still make a case that not to pay it off quickly. Under 5%, don't worry about paying it off early. Take your time, invest that extra money into investments that can grow over time, way faster than 5%. Hope this was helpful, and we have two tools that help you do that. Log into Xillion, create an account, and you will see how we help you categorize your debt into good, bad, and not-so-bad.