The Anti-Debt Fanatics Are Wrong.

Their simple advice hurts people who most need access to debt.

Anywhere and everywhere you go, debt is shoved into our faces. From the Amazon credit card and payday loans, to adjustable rate mortgages and credit lines for car repairs.

It’s a constant bombardment of cliches and exaggerations. Pretty soon, you start to think you’re in a George Carlin bit.

Free installation, free admission, free appraisal, free alterations. Free delivery, free estimates, free home trial.

And free parking.

No cash? No problem. No kidding! No fuss, no muss, no risk, no obligation, no red tape, no down payment. No entry fee, no hidden charges, no purchase necessary. No one will call on you, no payments or interest till December.

And no parking.

So you get home and hop on your computer to apply, but you see all the advice that starts popping up about how debt is bad.

You keep on reading, and you realize that most all personal finance writers, be it from books, blogs, or your brother-in-law, has declared a holy war on debt.

All debt. Any debt. For ever and ever, amen.

You read one horror story after another of how some poor schmuck got addicted to debt, opened 10 credit cards, and lost his house, his car, his wife, his kids, his job, and even his dog.

Now, you’re starting to second guess your decision, thinking that it’s just best to stick with cash.

Unfortunately, the all-cash method will come back to haunt you.

The problem with debt is not the debt itself, but the lack of understanding about debt in general.

• Where to get it
• How to get it
• How to use it
• How to get out of it
• How to embrace it without fear
• How to make it work for you

(This is starting to sounds like a certain Old Spice commercial.)

This article is not a diatribe against the math of debt. There are plenty of those on the interwebs, and I’ll let you do your own calculations.

No, before you start down the left brain rabbit hole of facts and figures, you need to meander through your right brain and how you feel about debt.

Debt is Emotional

The use of debt is a psychological issue, accompanied by an oftentimes visceral reaction

• At one extreme, you might think debt is bad, then forever berate yourself for having any debt at all.
• At the other extreme, you might think debt is inconsequential, and you get levered up beyond any possible ability to pay it back.
• Then there is the middle ground, realizing debt is a tool that, like the ocean, fire, or electricity, needs to be respected but not feared.

Your take on debt, as with most everything in our lives, depends on the attitudes of a) the people who raised you and b) your current social circle. The first plants the seed, while the second nurtures it.

I grew up somewhere between lower middle class and poor. After my parents divorced when I was very young, my mom had some pretty high credit card balances that took years to pay off. That experience led her to distrust credit cards with extreme prejudice.

My own experience with credit cards during college mirrored that experience, and the seeds of my own distrust blossomed into full on disdain for the entire credit industry.

It wasn’t until I was in my late thirties that I realized the benefits I was missing out on by eschewing the correct use of credit (e.g. cash back, better FICO score, building credit history, etc.).

The point is, take a look at your attitude towards debt and see if it is really your own, or if you are just mimicking your environment.

How is Debt a Good Thing?

Here’s a quote from the movie Too Big To Fail, attributed to Ben Bernanke.

I spent my entire academic career studying the Great Depression.

The depression may have started because of a stock market crash, but what hit the general economy was a disruption of credit. Average citizens unable to borrow money, to do anything. To buy a home, start a business, stock their shelves.

Credit has the ability to build a modern economy, but lack of credit has the ability to destroy it, swiftly and absolutely. (emphasis added)

If we do not act, boldly and immediately, we will replay the depression of the 1930s, only this time it will be far, far worse. If we don’t do this now [the bank bailout], we won’t have an economy on Monday.

The entire economy of the United States, and some might say the entire world at this point, depends on access to credit.

Credit allows us to act when it would otherwise be prohibitively expensive.

For example, it would take decades for to save enough money to buy a home with cash? No mortgage, no down payment, just 100% of the asking price delivered at closing.

And you would have to save that much while either paying for your current residence, either on your own or with someone else.

Let’s take another example. How many business have been started with a small business loan from the SBA, or money lent to you by relatives at zero interest to build your dream company?

One might counter that a company can always seek outside investment that isn’t a loan, and that holds some truth. But money gained by selling a share of your company is just another form of debt, to be redeemed when the stock holder requests it. Doesn’t that sounds a lot like a loan?

Debt is a Tool

One thing that needs to be understood right this instant is that debt is a tool. Nothing more, nothing less.

It isn’t your worst nightmare.

It isn’t your saving grace.

It is merely a financial instrument giving you access to cash now for repayment later.

And like any tool, you need to learn how to properly wield it before you can use it to your benefit, and that is a learned skill. Once acquired, using this skill to apply debt in the right circumstance can have incredible effects.

Take this circumstance described by Robert Heinlein in Starship Troopers.

…an untalented cook can turn wholesome dough and fresh green apples, valuable already, into an inedible mess, value zero.

Conversely, a great chef can fashion of those same materials a confection of greater value than a commonplace apple tart, with no more effort than an ordinary cook uses to prepare an ordinary sweet.

This is an almost perfect analogy when it comes to using debt, but I would add one crucial element: self-awareness of the temptations of debt.

It would be like putting the biggest sweet tooth in the world in the kitchen to make that apple tart, only to see them gobble it up entirely before selling it for more ingredients.

Debt can be used to finance opportunities that will pay back its cost 10 times over during the course of your lifetime.

• Starting your company (if it succeeds)
• Financing your education (yes, I’m defending student loans)
• Buying a house (what price is peace of mind, if that’s your thing)

The trick is not betting the farm on what you think is a “sure thing”, and minimizing your exposure should your venture fail.

The Final Word

I’m guessing that right about now, you are either raising your hands in complete agreement with this article or yelling at the screen in complete disagreement. (Didn’t I say that debt is emotional?)

For those of you who don’t have much of a position on debt, I hope that I presented it as one of your options to move forward with the larger projects in your life, such as school, buying a house or car, or starting a business.

In the end, debt is a force multiplier and time saver, but only if you use it wisely.

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.