Is Debt Bad?

Posted in Debt Help
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

is-debt-badIn today's society it is generally accepted that debt is good.  For most people it would be impossible to buy a house without a mortgage, to purchase a new car without financing, or even to attend college or university without student loans.

Debt allows us to finance things we cannot buy today, so on that basis debt is good, right?

Perhaps, but let me offer an alternative viewpoint (or watch the video where I discussed this topic on the radio):

Debt restricts your freedom, so for that reason debt can be bad.

Consider the case of Fred (not his real name) who financed a car, so he could take a job an hour from home.  It was a good job, but Fred soon discovered that almost half of his paycheque was going towards his car payment, gas, car insurance, and repairs and maintenance.  Fred was stuck.

He soon realized that he would be better off taking a lower paying job that he could walk to then taking a higher paying job where he was making big car payments each month.

For Fred, debt was bad.

Or consider the case of Mary (not her real name), who wanted to own her own home, and in 2007 bought a house in Ontario with only a 5% down payment.  She was happy, because it was her own home.  Unfortunately in 2011 her company closed down, and to find work she decided to move to Alberta.  She put her house up for sale, and was shocked to learn that she bought her house when real estate prices were high, and her house was now worth less than what she paid for it.  If she sold her house she would have to pay real estate commissions, legal fees, and a penalty to break her mortgage, and she would end up losing $20,000.

Mary wanted to sell her house and move, but she was stuck because of her debt.  She was trapped.  She had no freedom.

Fred and Mary learned an important lesson:

If you have debt, you are trapped.

Of course the opposite is also true:

If you have no debt, you have freedom.

I'm not saying that you should never take on any debt.  I can tell you the story of many people who bought a house 20 years ago, and now it's paid off and they are living mortgage and rent free.  For them, financing a house was a smart financial move.

My point is this: before you take on any debt, understand that you are limiting your freedom.  Realize that if you are locked in to a house mortgage it's not always easy to pick up and move. While a car loan may get you a nice car, it also brings with it a large payment each month.  Crunch the numbers to see what you can afford, but also look into the future and decide if you really want the commitment to the house, or car, or whatever else you have financed, because it may be a commitment that will last for many years.

If you already have more debt than you can handle, and if that get has taken away your freedom, give us a call at 1-866-747-0660, or send us an e-mail, and let's get started on a plan to get you back your freedom.