Historically, I’ve taken a negative stance towards debt.
For that, I do not apologize.
I’m very conservative by nature. My own debt allergies started young. The negative math consequences of debt never made any sense to me. Debt does not seem like a good financial plan.
Back a dozen or so years ago when my wife and I bought our first car, I went out and borrowed money for the car. We kept the loan for less than six months and I transferred over some funds I had in Canada to pay off the loan. I finished school with $5,000 in loans. Those were paid off within a year.
I’ve never looked back on any situation where I’ve borrowed money and said, “Rats, I wish I’d borrowed more money, more often.” In fact, I attribute our (both my wife and I) debt avoidance as a key to our current financial health.
Yes, I would intellectually agree with the fact that there are situations where it makes sense to borrow.
Still, I freely admit that probably highlights more about me than how lending and economics operate. It indicates that I grew up in a middle class home where I had the option to save and thus avoid debts. But not all of us enjoy that luxury. I had the luxury to choose to avoid debt.
The poorer your background, the more likely it is that debt will play some role in your journey out of debt. In fact, I think there are probably more situations where it makes sense for people in developing nations to borrow for certain things. When I was doing a Financial Diet Seminar in Quito, Ecuador, one student called me on it. He challenged me to realize that, for the poor, borrowing is often their only way to open a door.
So, I’m forcing myself to think outside of my negative debt box.
The Higher Education Option:
If I came from a poor background and I had a son or daughter who had the opportunity to go to college and we couldn’t afford college, I think I’d 100% support the idea of him or her getting as many loans as possible. For many, there is a certain window of opportunity to get a college degree. If we don’t get it at the right time, life catches up to us, and we find ourselves committed to other things before we know it. I’d encourage my son or daughter to get the loan with hope that they would get a much higher paying job post-college and that over time they could pay off their education.
The Middle-Class or Wealthy
If I were from a middle-class background, I’d also 100% support the idea of my kids getting a college degree. However, I’d start training them at a younger age to get jobs, save money, and avoid college debt if possible. That’s a luxury the middle class have that the poor don’t. I’d also continue what I’m already doing as a parent – putting some money in college savings for them every year.
Positive Uses for Debt
I get a yucky feeling when I write that because I’m afraid that some of you will think I’m saying debt is good and want to go out and get this type of debt because it’s good. Debt may be a best case scenario, but infrequently is ‘good’ the best word for it.
Investing in education through loans could provide the largest returns over a person’s lifetime. If a student were diligent and dedicated, it would be a solid reason to get debt.
Buying a house without any sort of a loan is a hard thing for a young couple to do. However, I think the older we get, the larger percentage of a down payment we should have. Of course, houses have the potential to go up in value, so it has the potential to be a wise investment (though I don’t think of a house as an investment).
Personally, I wouldn’t do this, but I have the option not to do it. However, there are many business that need start-up capital. This is especially true amongst the poor. I’m a fan of organized forms of micro-lending and even at one time tried my own lending system when we were in PNG. I wouldn’t advocate going out and borrowing massive amounts of money, but some people swear by it. Michael Hyatt says you need to put skin in the game. I wouldn’t, but I also have a lot less opportunity for significant earning and less opportunity for significant losses.
4. Medical Bills
I suspect that there are situations where a medical procedure is a necessity, and I’d consider borrowing to do the surgery.
I’ve had a guest post on this blog on why going into debt for an adoption is the right thing to do.
So, help me think out of the box.
In what other cases or situations would you borrow money? Have you borrowed money for something and you’d go back and do it again?