Debt Takes Away Choices

Is debt good or bad? Is there such thing as good debt? These are difficult questions because as with most personal finance issues, the answer is as individual as you are. For the most part, debt is bad. Sometimes debt can be good. But always, debt adds risk to your life and – debt takes away choices.

There are a few basic rules however to see if debt is good or bad. First, does it provide positive financial leverage? Huh? Okay, does the debt have favorable enough terms (rate, payment, length of loan) that the amount of money you will make or save because of that debt far outweigh the risks and costs involved? Example: Student Loans. If you borrow $50,000 to graduate from a top tier school with a degree in Engineering with an expected starting salary of $60,000 per year, then that is a good debt. Why? Because if you work at $10 per hour for the next few years to save enough to pay cash for college, then graduate with that same job, you missed on a few years of making $60,000 while working to save for college! So you are better off having borrowed the money.

On the other hand, if you borrow $100,000 to graduate from a mid-level college with a degree in creative basket weaving and an expected starting salary of $35,000 per year, well, that is bad debt! It will be next to impossible to pay off those loans!

Let’s get to the main point. Debt takes away your choices. See, if you borrow $150,000 to become a lawyer and then decide to work at a legal clinic with a salary of $50,000 per year, you can’t. You don’t get to make that choice because you already used up that choice when you chose to borrow that much money. Let’s say you hate where you live or you find a great opportunity to move somewhere else and take your dream job. But let’s also say you owe $350,000 on your home and it is only worth $300,000 due to the housing market. You can’t move! You already made your choice when you borrowed that much money.

The list goes on and on. The $200 monthly furniture payment along with the $400 monthly car payment and the $75 credit card payment, and so on all add up to… you don’t have any money left to do the things you actually want to do! Your budget may be so tight you can’t even afford to drink your favorite coffee!

So what can you do? You can pay off or reduce your debt, which I will explain in detail in a future post. By paying down your debt you will improve your credit score, have more money left over to make other choices, and you can actually breathe a sigh of relief. And next time you get your coffee, tip your barista really well. She is still trying to pay off her $100,000 student loans for her creative basket weaving degree.

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The three authors, Bill Pratt, Mark C. Weitzel, and Len Rhodes, are industry leaders in personal financial education. Together, they have a combined 75 years of experience in banking, economics, and entrepreneurship. Now, they teach thousands of students personal finance concepts and decision making skills, author textbooks and public press books on personal finance, and help schools develop innovative personal finance literacy programs. Recently, they were instrumental in developing a personal financial management certification program for leaders in higher education. The other books in The Money Professor series include The Graduate’s Guide to Life and Money and Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt & Ca$h. Their books, lectures, and programs give students, parents, and educators the tools and knowledge to make good financial decisions all their lives.