The only two reasons to go into debt – ever!

Published October 31, 2016   Posted in How to Save

I feel like I’m going all “Dave Ramsey” on you people, but debts are serious business. Debts put us into a position of weakness by owing money that we currently do not have. While there are legit reasons to take on debt, the majority of Americans accept these financial weaknesses too freely.

Debts are big business in the United States, and they bury too many Americans underneath mountains of stress that are tough to escape from. Some frightening numbers, from

U.S. Consumer Debt

By Household Total debt owed
Credit cards $15,675 $729 billion
Mortgages $172,341 $8.36 trillion
Auto loans $27,865 $1.1 trillion
Student loans $48,591 $1.26 trillion
Any type of debt $132,158 $12.29 trillion

Pinterest: The only two reasons to go into debt - ever!These numbers are startling, and I do not believe “good debt” exists. I do accept that some debts – like student loans for the right degree, can improve our financial position over the long run. But, we Americans also need to be keenly aware of exactly what we’re doing and understand the gravity of our choices before debts can turn into a positive.

The $729,000,000,000 of credit card debt that murders the futures of Americans is an unfortunate indicator that we don’t know what we’re doing. Debts are easy. The cheap availability of credit in the United States is killing American retirement.

It’s out of control, and our collective willingness to accept the financial burdens of debt is devastating. We accept debts as a natural part of life, and that’s the wrong attitude. They don’t have to be natural.

To this humble little personal finance blogger, only two GOOD reasons exist to take on more debt – and by “debt”, I’m talking about debts that can turn positive, like student loans and mortgages. If your situation doesn’t fall within these two categories, it’s probably not a good idea.

The two reasons to take on more debt

1: You’re in good financial standing

Those who are in good financial standing can “afford” debt. They have a good, steady job and earn quite a bit more than the anticipated monthly payment to repay the debt.

They currently have no debts – or very little. If they lose their jobs suddenly, they can afford to keep paying their monthly payments for several months.

They have an emergency fund with at least three months of living expenses.

They don’t live paycheck to paycheck and have a proven track record of paying monthly bills on-time. Automatic monthly payments are even better.

They regularly spend less than they earn.

How much debt to accept: If we are talking about mortgage debt, conservatively, do not take on a mortgage payment of more than 30% of your take-home pay. Take-home pay means after taxes. If you’re willing to accept more risk, then don’t let your mortgage payment exceed 30% of your pre-tax pay.

For student loans, don’t take on debt to attend an out-of-state school! All accredited universities in the United States – yes, including your state school(s), provide fine educations to get your foot in the door in corporate America. Don’t kid yourself into believing that expensive out-of-state schools are somehow “better”. They aren’t.

Also, choose a degree program with earnings potential. Students who major in subjects like Art, History, English and Medieval Studies face an uphill battle after graduation. Although student loans can be differed, the debt will remain attached to you like that tattoo of your boyfriend/girlfriend’s name you foolishly got when you were 17. The greater your salary, the quicker your debts go away.

More on student loans and degree programs below.

2: There is a damn good reason / good payoff

The payoff must be worth the risk of taking on debt. For example, using a student loan to fund a computer science degree, for example, can easily turn positive after just a few years of working in information technology – a sector with traditionally big salaries. Business Management, Accounting and Finance degree programs are other good choices for bigger payoffs.

However, it is probably tough to argue that a $40,000 car loan was worth the risk. Less expensive cars exist – nice cars that “go”. They get you from Point A to Point B just like the expensive car.

Buying a house with a $150,000 mortgage in a real estate market where rents are high may also make sense. But even then, understand how expensive homeownership truly is.

Smart debts offer a quantifiable return.

Is there a quantifiable return on the debt? If so, consider taking on the debt if your financial standing is solid. Or if you’re a student, consider the debt if the degree program produces a reasonable expectation of a good income and dependable job prospects.

For example, the average student loan debt in the U.S. is just over $37,000. What degree programs set us up to pay off the debt quickly? On average, first year accountants make over $53,000. Finance majors average $55,400. If you’re into computers, you can expect an average salary north of $60k right out of the gate. These wages make re-paying student loans easy.

Consider job prospects, too. How likely is it to find – and keep – a job after graduation? Take a look at unemployment rates based on degree program. Areas like philosophy, hospitality and some of the “softer science” disciplines tend to result in higher unemployment. Do you want a job after graduation?

Note: This is not meant to discourage anyone from getting a degree in your chosen area of interest. But on the flip side, we all need to make a living. Choosing a degree program that gives us the best opportunity to excel, earn money and build wealth – even if that means temporary debt in the form of student loans – is the wisest choice. Choosing the right degree program provides a nice foundation for potential earnings and sets us up to quickly build wealth and maybe even retire early.

Remember that the more financially conservative you are, the greater your options. Your flexibility in life increases as your debts decrease. Losing a job becomes less impactful with a lower house payment or fewer student loans, and you also won’t find yourself as one of those Americans who becomes a slave to their debts. I was there too. I know how it feels.

Debt is NOT a “part of life“. Debt is a choice that each of us willingly accept. Do not accept debts lightly.

We track our net worth using Personal Capital


54 responses to “The only two reasons to go into debt – ever!”

  1. Great reminder, Steve, and good guidelines. I also think more college students should consider Community College to knock off some of their required classes at lower cost, transferring later to a full University for graduation cred. We paid off our house earlier this year, and it feels wonderful to say “We’re Debt Free!!!!” (Hey, you’re the one who brought up Dave Ramsey!)

    • Steve says:

      Great point, Fritz. Community colleges do offer educations that are just as good (if not, better, due to smaller class sizes) than larger universities at only a fraction of the cost. I wouldn’t hesitate to go this route if I had to do it all over again.

      Congrats on the debt free ness! 😉

  2. Roadrunner says:

    Totally agree. Besides of mortgage and student loan there’s no good reason to have a debt. It simply means that you use money for something that you can’t afford.
    Maybe two things to stress out: student loan can be a “good debt” as a good degree can get you a better job/salary. But once you’ve graduated, it’s purpose is fulfilled, so try to get rid of it quickly. Mortgages on the other hand can be a part of your life for a longer time. Just make sure you buy something that you can afford (don’t max out the mortgage you’re entitled to get), plus you only buy if it’s more beneficial (or at least not much worse) than renting the same type of property. Checking the price to rent ratio in the area can be a good indication.

    • Steve says:

      Thanks Roadrunner – I agree that student loans can definitely turn into a positive, but only if used to obtain a degree with reasonable job and earnings prospects. I don’t necessarily agree that taking out student loans for a degree that’ll just sit there on the shelf is all that beneficial. Gotta be put to good use. And your thoughts about mortgages is so true. Maxing out your mortgage definitely puts us in a position of weakness. Our options dwindle. Flexibility suffers.

      Thanks for the comment!

  3. 100% with you on this one Steve! We “preach” this to our kids too now that they are young adults. I just added it up and we have $410K in mortgage debt right now – and that is all of our debt. And that is on rental properties where other people pay that mortgage. We were even very careful with that debt and bought multi-family properties where the likelihood of vacancy would be lower so we could still cover mortgage payments ourselves if needed. Debt is a choice – and debt breeds more debt in many cases too. Have a great week!

    • Steve says:

      Thanks Vicki! You’re right – debt breeds more debt in many cases. It’s a wicked cycle that begins to snowball, quickly overwhelming us if we aren’t careful. But hey, it is nice to have other people paying your mortgage through rentals!

  4. Yes! And this is true for all debt. It makes me so happy to see mortgages on this list. I was so used to people talking about mortgages positively (good debt…barf) that I didn’t even view us as having debt for along while. Boy is that wrong!

    • Steve says:

      Thanks Penny. I’ve never really understood why mortgages were considered “good debt”. I do get the fact that homes can appreciate. We can make money off of them, especially if we buy specifically to flip. But to me, that’s much different than the typical person taking out a big mortgage to pay for their own home. That’s something that MOST of us don’t wind up making money (if any) money on, especially after factoring in the total cost of ownership.

  5. I mostly agree Steve. Debt is generly only for buying things that appreciate. Otherwise by paying interest your paying both the items depreciation and your loan interest which makes it more expensive then it’s otherwise worth. However I do occasionally make an exception like the last car I bought. I financed the car not because I didn’t have the cash to buy it outright, because I could have handed the dealer the cash at that moment. No I took the car loan because it was 0 percent and even my bonds make 1 percent. The dealer wasn’t giving a cash discount because the mfg was giving 0 percent. That being said I struggle to see that as debt. It’s a liability but the cash paying it is tied directly to an asset I don’t touch. If I didn’t have I wouldn’t buy it to your original point.

    • Steve says:

      Admittedly, I took a 0% interest loan on the CTS I bought as well, so I definitely know and understand where you are coming from. One could also make an argument that stock market gains might overpower low-interest loans from a pure financial standpoint. I can see those as possible exception points. If you know what you’re doing, one can certainly control debt to a point where it doesn’t overcomplicate their life.

      Thanks for the comment!

  6. I like to think of debt as a four-letter word. That said, we did have some college student loans (that we paid off within 4 years of graduating (worked to pay for grad school tuition). We also paid off our mortgage fully a couple years ago. I think it is critical to be completely debt free before thinking about early retirement.

    • Steve says:

      Thanks MrFireStation – I’m right there with you. Being debt free makes early retirement so much easier to manage. And the debts that we DO take, pay them off as quickly as possible, like you guys did. You are a perfect example of what happens when YOU control your debts, rather than visa versa! 🙂

  7. Well said, Steve! It astonishes me that large car loans (or any size, really) are considered normal and not unwise. Cars are a depreciating liability–why would you want to pay 5% or more interest on something that is rapidly losing value? We try to buy cars after they’ve taken their greatest depreciation hit, and then in cash. Student loans and mortgages are different, I agree. And if you can avoid the consumer debt and car loans, you can probably pay those legit forms of debt off in good time.

    • Steve says:

      Good point, Kalie. Avoid consumer debt and paying off loans that might actually make practical sense becomes a heck of a lot easier. I like making life easy! 🙂

  8. Apathy Ends says:

    Taking out waaaay to much student loan debt set us back at least 2 years – and it could have been 8-10 if we didn’t get our shit together and realize the financial impacts of only making minimum payments.

    Great reminder Steve – keep spreading the word

    • Steve says:

      Thanks Apathy, appreciate your honesty! Yeah, minimum payments can be a killer, no doubt. Glad you guys straightened out your financial situation! Just imagine if you hadn’t. 🙂

  9. Very well said Steve!

    I have a personal rule around debt that I’d like to share — “Never borrow money when you need it.”

    It sounds crazy, I know…but it actually forces me to be in very good financial standing. When we purchased our house, I could have paid cash for it.

    Capital allocation is about putting money where it earns the best returns. Paying down loans isn’t always the smartest choice.

    • Steve says:

      I like that motto, actually! When we need it, we are more likely to put ourselves further at risk by accepting less-than-ideal terms. Excellent point, Mr. Tako!

  10. Good point! Even within mortgage debt, there is good and bad debt. Buying a modest house is OK, but sometimes the “a mortgage is good debt” myth is extrapolated to “a mortgage on a McMansion is even better debt” We saw where that ended in 2008/9.
    What’s more, in a lot of places that modest home would be the most expensive to rent as % of the home value, so going into debt and paying 3.5% for a mortgage when the home rents for over 10% of the house value, might actually be worth it.
    Great reminder!

    • Steve says:

      Thanks for the comment! I just think that too many of us assume that our home are “an investment”, and the term “investment” portrays something positive. It can certainly turn positive, but that is far from guaranteed.

  11. Mr. PIE says:

    We are proud to say that we have never ever carried forward a credit card balance in nearly twenty years of having them. Credit card dollars (+ points ) make travel prizes and that is what credit cards are good for. Nothing more. A low interest rate mortgage with a balance that is much lower than 30% of net income along with living in a locale where you can sell reasonably quickly at profit is key. That combination is fiendishly difficult to achieve and why so many are in big time debt.

    • Steve says:

      Good on you, Mr. PIE! Like you, I’ve never carried over a balance on my credit card even once. Luckily, my dad drilled that into my head from a very early age. I did do the car loan and mortgage, though.

      You guys definitely know how to live within your means, and I’m sure that your net worth shows it!

  12. Basil says:

    As a recent college graduate I’d like to add to the degree conversation… I got a social science degree with poor job prospects, but I didn’t take out a loan to do it. Thankfully I have a decent paying job one year out, and we’re able to invest two thirds of our income every month. My friends with similar degrees and jobs but debt thrown in have a much harder time saving. That extra drain on your paycheck right at the start of your investing career robs you of years of interest that make even small invested amounts worth a lot when you eventually need the money.

    I found my studies incredibly enriching, and I use my understanding of people, culture, and language every day in my job (in a completely different field) and life…but I couldn’t recommend this path to anyone not paying for their education with cash or scholarships. If you’re accepting a degree that won’t advance your earning potential that much, you can’t also start out with a negative net worth. It’s not fair to your future self.

    • Steve says:

      Thanks Basil – paying for your college outright is a wonderful thing to do and definitely makes it easier to turn a net positive in the working world. Like you said, starting life out in debt can certainly stunt your financial growth. Some never seem to get out from underneath the revolving door of debt.

  13. Andrew says:

    Great points Steve.

    I am sometimes baffled as to why some people get expensive degrees in Art History or other similar fields. It’s very hard to get decent jobs coming out of those programs. And these days getting a college education is like getting a mortgage!

    I’m happy that the only debt I have is the car I purchased last year. It couldn’t be helped my old one was a 1998 Jimmy that was falling apart!

    • Steve says:

      Ha! Hey, sometimes we gotta do what we gotta do. And yeah, it’s one thing if you already work for a company that wants you to have an Art History (or similar) degree. But unfortunately, most don’t, and it can be darn tough to find a job with that kind of background.

  14. Agreed. I think many young adults get their minds set on a path (career and education) and don’t explore all the options, so they take on the student loans with the thinking that they don’t have a choice. It’s always a choice, even if it is for a future career.

    Our 16 year old has decided on a career path and, initially, wanted to attend a college with a price tag of nearly $200,000 for 4 years. He was a little stubborn at first, but when he added it all up and took a close look at what his earnings would likely be right out of college, he realized the debt could affect him for decades (so grateful he came to this realization). After much discussion, he’s now looking at other, more economical options (including military, as the benefits include money for college).

    • Steve says:

      It’s great that your son came to the realization that the debt probably wasn’t worth the reward. He’s beginning to weigh the pros and cons of life’s choices and think economically, which is a great sign. After my collegiate career, it would be tough for me to stomach a $200k price tag for a 4-year degree. In fact, that probably wouldn’t remain in my stomach for too long! 🙂

  15. I was raised to believe that the ever-revolving door of debts was completely normal. I figured I’d be in debt my entire life, which would be paid off with life insurance once I die. …That sounds absolutely insane now that I know better! Who wants to be in debt until they die?

    At this point, we’re getting out of debt and avoiding debt at all costs. Even when we have a decent reason, we still prefer to use cash over credit. Money isn’t a means to an end; it’s a tool for achieving freedom in a world obsessed with owning things they can’t afford in the first place.

    • Steve says:

      Wow! Yeah, that’s quite the unfortunate predicament. You probably resigned yourself to making any serious headway towards retirement, too – until you realized that there might be a better way. Thanks for the comment!

  16. Joe says:

    I agree with the other comments that mortgage and student loans are the best loans. Of course, you shouldn’t take on 6 figures students loan if you won’t make any money with the degree. Maybe go with community college for 2 years or live at home and go to a nearby college.
    You also need to be smart about mortgage. Your primary residence isn’t an investment. It’s just a place to live. Don’t take out a huge mortgage if you can’t afford it. Mortgage on rental properties is another matter. That’s a great investment.

    • Steve says:

      Thanks Joe! Yup, community colleges very often offer the same education at a fraction of the cost. Especially if you’re paying your own way with student loans, this seems like an excellent technique to use if you can.

      Appreciate your comment!

  17. Right on, Steve. I made sure my degree was going to pay off. I also took summer and winter courses at the local community college to lower the overall cost of my degree. I also took slightly heavier choose loads to make my semester schedule worth the fixed cost and graduated in three years.

    • Steve says:

      Nice, Green Swan! Sounds like you totally rocked it going through college and finishing early. I wish that I were that “with it” when I was in college. Finishing early is never a bad thing!

  18. TJ says:

    In my opinion, auto loans were my best debt because they are available at such a dirt cheap rate. When I had a loan on my Civic, it was less than 2%.

    Obviously you shouldn’t use that as justification to purchase a more expensive car or to purchase a car in the first place if you have otherwise decided to be car free, but if you’ve already decided that you’re going for a car, might as well get a dirt cheap loan and invest your capital.

    I mean, why pay 4% on a mortgage when i can pay 2% on a car? 😀

    • Steve says:

      Ah! Yes, I can agree with your reasoning, but this also assumes that you have a GOOD understanding of how all this works and are probably in complete control over your finances. I do agree that an extremely low interest rate on *ANY* car, regardless of the cost, could provide a legitimate return if that additional money – that would have been paid for the car – gets invested instead (or remains in investments). 🙂

  19. Jack says:

    As always, it comes down to choice.

    Too many people in the developed (and developing) countries are too easily swayed by the media images of conspicuous consumption – the latest car, the latest fashion, the exotic vacation spot, the hot new club. This leaves consumer in the US keeping up with the Joneses and everyone consuming our media wanting it too.

    The slow process of global economic leveling across developed and developing economies will be very painful for us all.

  20. RAnn says:

    I’d say another exception would be to buy something you could afford to pay cash for, but which is offered at some sort of ___ days same as cash. I have a couple of furniture bills I will be paying for years, but it is no skin off my nose. The money comes out of my bank account and into theirs with no effort on my part and no stamp. I didn’t have to pause retirement contributions or refill my emergency fund. Also, we recently financed a new car at 1.4% from our credit union. While no investment is a sure thing, I certainly hope to earn more than 1.4% on that money and the payment is manageable. Yes, we had a car account but decided this was the better financial decision.

    • Steve says:

      Hi RAnn – agreed, there are times where doing something like that is probably wise. But then again, as long as we’re smart with our money and *KNOW* how to manage our finances correctly, we probably can make a few more exceptions for ourselves because we know that we won’t get ourselves in over our heads.

      Thanks for the comment! Keep fighting the good fight.

  21. “For student loans, don’t take on debt to attend an out-of-state school!” Great advice. Unless you’re going to an Ivy League school or a school like Stanford where you’ll be able to tap into an incredible network, the high cost isn’t worth it. It seems that especially on the coasts, kids think they need to go to a private school. This mistake is compounded even further when they don’t know what they want to do and end up with $100,000 in student loans and a job that pays $30,000.

    Very good advice overall. I’m pro debt when you have a good reason for it and have some good financial sense. The problem is, not many people have received even a basic financial education.

    • Steve says:

      Thanks for your feedback, Go F’ Yourself. I agree – unless it’s a school with clear earning prospects, I’d save the cash. The private school thing at the University level doesn’t exactly knock my socks off either. It’s all debt, one way or another.

  22. It’s so true. The thing with people who argue that “you should follow your passion when it comes to picking a college major” is that passion sometimes doesn’t pay the bills. That’s why my philosophy is to always follow the money first, then the passion second (unless the job is illegal, unethical, etc).

    If someone’s truly passionate about arts and history, then no one is stopping them from pursuing it as a minor or taking additional classes on top of the minor. Finding the difference between the main and side is a key thing!

    I was going to argue that student debt can be seen as the good kind of debt when you said there isn’t any good kind of debt but you’ve clarified that further.

    • Steve says:

      Thanks FS – yeah, the “follow your passion” is a sticky argument for sure. On one hand, yes, you certainly don’t want to spend your life doing something you hate, but on the other, you gotta make a living, too. We need to think of our job prospects. And maybe we don’t need a degree in *EXACTLY* our chosen field of study, but perhaps something similar instead with improved marketability and earnings potential.

  23. Mrs. BITA says:

    $15675 of CC debt per household! That is an extremely scary number.

    I agree with the vast majority of your post and personally the only debt that the BITAs have is our mortgage. The one sentiment I disagree with is “choose a degree program with earnings potential.” We, as a society, as a civilization, need our artists, our thinkers, our dreamers, our philosophers. It would be dreary society if everyone only pursued things that made money. We need to make room for those that contribute in ways that benefit us all. It is a tough problem to solve, but as a society we need to patronize the arts.

    • Steve says:

      Thanks Mrs. BITA. I definitely agree with your thoughts about artists and dreamers. But, I give that advice knowing that not everyone is going to take it. I know folks will go their own way, and that’s good. We need people to follow their dreams. But, we also can’t have those folks living on the street or completely off the backs of the taxpayer either. It’s a fine line, no doubt.

  24. For me there is no reason to take a debt expect you buy a house.

    • Steve says:

      That is certainly one reason to go into debt – although, homeownership is much more expensive than people tend to think. Investing in real estate, though, can definitely turn lucrative, especially if you know what you’re doing. 🙂

  25. I’ve had car debt and student loan debt. Only one of them was worth it. In the end I took out about $40k in student loans. My salary today is easily $40k higher than it would have been if I didn’t take those loans to get my accounting degrees. Well worth the investment. Now the car loan to buy a Cadillac when I was 21? Not so much.

    • Steve says:

      You and me both, Fervent. Same car, probably similar car loan, too. You bought a little earlier in life than I did, although the Corvette was my earlier car mistake. Fun car, though.

  26. George Ambrose says:

    Im sooooo glad that i ran into u guyz. Finally a cut to the chase truth. Will use your words of truth as my reference for the most part when talking about financial topics with my folks in general.
    tnx tnx..

  27. I am totally agree with you 🙂 In the different stages we scene different methods money and ratio too . When money comes out of my bank account and into theirs with no effort on my part and no stamp. I didn’t have to pause retirement contributions or refill my emergency fund. Also, we recently financed a new car at 1.4% from our credit union. While no investment is a sure thing, I certainly hope to earn more than 1.5% on that money and the payment is manageable. Y

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