Every once in a while, a customer will share a piece of “good advice” that blows me away and not always is a good way. Yesterday was just one of those days. For privacy sake, we’ll call her Amanda. Travel back in time with me for a moment.
I’m sitting at my desk, with Charmed playing in the background and processing a quote for a customer. The phone rings and Emily says that Amanda Customer is on the line with a few questions for me. I haven’t spoken to Amanda in a few months but I recently sent her a request for an annual policy review. That’s probably what she is calling about.
“Hi Amanda! How are you,” I asked. She responded that she was doing well but wanted to pick my brain and see what I thought about something she’d heard. “Sure thing, lay it on me!” She asked me to explain the difference between good and bad debt. She’d gone to a finance seminar and the presenter had shared that there were two kinds of debt. Good debt is debt you bring about to improve your quality of life. Bad debt is used to finance frivolous things you can live without. Now before she said any more, she asked what I knew.
I shared with her that the distinction between good and bad debt is like distinguishing between two quarters and five dimes. There are situations where the 2 quarters would be preferable, such as if your juke box will only take quarters but in most situations, the five dimes would work just fine. After all, 25 cents is 25 cents. I warned her that good and bad debt are similar. In most cases, debt is debt. To the owner of the debt, debt is definitely debt. The only scenario in which debt is separated in this way, is for potential creditors.
When deciding whether to lend to you or not, a creditor will classify your debt as good or bad. For example, your mortgage, school loans, real estate loans, and business loans are considered good debt while credit cards, store credit, and auto loans are considered bad debt. Good debt says you are a responsible person and will likely pay your bills. Bad debt says you live beyond your means and will likely have trouble paying your bills. Hence, creditors like good debt and avoid those with a disproportionate amount of bad debt.
I told her that while all of that is good to know. The most important thing to know is that asset attainment is a part of life. The question is, will you attain assets or become an attained asset. When you own items, you own assets. When you owe debt, you are an asset owned by the creditor. Knowing this, I advise my customers to make smart decision about debt in general. Think about debt as sustainable or not sustainable. Think of debt in the terms of the impact to your life, not your creditor’s bottom line.
Sustainable debt is debt that fits within the confines of your budget, but doesn’t exceed its boundaries. Debt that exceeds your budget boundaries is like a magnet and encourages more of the same with characteristics like low introductory rates and increasing spending limits. They build a hole from which you may never emerge. Sustainable debt fits into budget with characteristics like stable payments and interest rates that can be paid back on schedule. I asked her if that made sense.
She said that it did. She understood that she should consider whether debt was sustainable or not sustainable rather than good or bad. She pointed out that when she left the finance seminar she was thinking that she needed to cancel her credit cards and start investing in property. But, if she really thought about it, cancelling her credit cards might be a good idea but her budget wasn’t healthy enough for real estate investing yet. Not if she wanted to make sustainable choices.
At that point, I knew she got it. As I hope you do. If you have questions about how to determine if a purchase can be considered debt or not, simply do this. Lay out your budget. Be as specific with your expenditures as possible. Add in your considered purchase. Because we are creatures of habit, without moving anything around, can your budget handle the addition. If so, feel free to continue considering your purchase. If not, you may want to put it aside for now and revisit at another time.
Thank you so much for spending this time with me. I hope you have an agent that you can call and have these conversations with. If not, you should consider giving a Farmers Insurance agent a call. I’m in GA and would be always be open to answering any questions that you may have. Until next time.
Have a great day!