I saw something interesting on the yahoo main page today. It is an article called The Myth of Good Debt. Certainly it is good for a coffee break or a few minutes of internet time wasting.
The whole subject of "good debt" vs bad debt has always kind of bothered me. Plain and simple debt is bad. You are promising future earnings for something now. You are almost surely paying interest for this service.
To be honest I think it is more like kind of bad debt and really bad debt. I would characterize home mortgages and education is kind of bad and consumer debt, credit cards, car loans and the like and really bad debt. The label good implies that it is smart to have this debt and it does great things for you. Sometimes that is right. In particular getting a college degree greatly increases (on average) your earning power. If you could figure a way to get through school with no debt or low debt that is ideal. However since educational costs have increased greatly beyond inflation or typical low level (working your way through school type job) wages that isn't always realistic.
Tangent begins- Also I would submit to some people that working your way through school at a low paying job and taking classes part time isn't the best route anyway. I have known a lot of people who had significant life problems as well as academic difficulties that lead to them not finishing school. They take a class here and another there and periodically have to drop out due to life reasons or even fail classes. Screwing up and not getting to a place where they can earn a comfortably livable wage and then continuing to earn 7-12 bucks an hour is pretty common. These folks then whine about how life is so hard and it isn't fair and generally have a long term pity party. What would often be a better course of action is to decrease their lifestyle if applicable, work less and borrow just enough to make up the difference. The difference between going to school and working 12-20 hours a week or 30-40 is huge. At minimum wage or close the amount of money we are talking about isn't that big. They could focus on school more and get it done at a decent pace. It probably will not be too hard to pay back said money with their increased future earnings. This is basically what I did and while I should have borrowed a bit less lived a bit cheaper it has worked out pretty well for us so far. End tangent.
With educational expenses should come degrees or certifications that significantly boost your earning power. I have got news for everybody. The days when a guy could graduate high school and fall into a comfortably paying job doing work trained monkeys could do are over. We could talk about why this has happened but it doesn't change that it has. Especially with today's economy and jobs being scare you need to be marketable.
Mortgages are slightly worse than educational expenses IMO. I say this is because they do not have the same kind of exponential payoff as education (if properly targeted and used). Also the returns are generally less of a sure thing. House prices have a great long term track record but the short-mid term can be wild.
It would take a really long time for most people to save the cash to buy a traditional home outright. There are certainly some benefits to alternative housing but if you don't want to go that way the options are saving a lot of money for a very long time or getting a mortgage. Certainly paying the landlords mortgage for decades instead of your own and not getting the tax benefits or the appreciation in value doesn't make any sort of sense.
Getting a decent fixed mortgage you can actually afford on a home makes good sense for somebody in a stable financial place with some savings. As you noticed that sentence was kind of complicated. Maybe adjustable rate type mortgages or other exotic options make sense for some smart people in some situations. However for most people they are a horrible decision. If you can't afford a fixed rate it means you can't afford the home. Stability is very important as even short mortgages last many years and you need to be able to make that payment every month. Personally I have seen a lot of people get into trouble when they happen to get a job that pays somewhat better than they can expect elsewhere, 10 dollar an hour type guy earning 13 or a job that pays 70k instead of 55. The issue comes when they get a loan they can afford at their current higher wages and for whatever reason (laid off, fired, decide to change fields, etc) they end up changing jobs. Think about how much you could make at another job. Also having a safety net in the form of an emergency fund is essential. You've got to be able to deal with that month the car breaks or being out of work for awhile. I think Chief Instructor said once that a month of looking for every ten thousand dollars in salary is a guideline.
Part of my concern is that the concept of "good debt" leads to an attitude that having this debt is normal and even smart. Yeah it smart to increase your earning power with a degree and eventually purchase a home. However it is really smart to pay off that student loan as fast as possible and in time the home too. Having a mortgage (for the right person) beats the heck out of renting but owning a home free and clear beats the heck out of having a mortgage. I think it is also worth noting that if you buy a modest home you can actually afford paying it off at an accelerated rate is probably realistic. If you get absolutely as much home as you can make the payments on of course it isn't realistic to pay 10, 20, 50 or even 100% extra principle payments.
Cars I would classify as the best or most understandable of the "bad debt". Buying cars with cash is ideal. However "clunkers" can have some real problems. Some folks are good at fixing cars or just lucky and others have horrible luck. Often clunkers are unreliable and just $400 the heck out of you until they die. Basically if you aren't able to save a decent bit of cash and need a car for transportation you're pretty much stuck getting a loan. The real problem is how expensive of a car you get. For example awhile back my little sister found herself needing a decent reliable car. She went and got a loan to pay for a few year old basic car. Not a junker but also not new or fancy or anything like that. She paid it off faster than the loans planned life and still drives it. You need reliable transportation, not a new Mercedes. Look at it this way. If you can't afford to pay cash it means you aren't in a great spot for getting this car so be reasonable.
Consumer loans and credit card debt and such are just bad. The best case is that you use these as a sort of emergency fund because you haven't saved a couple months worth of expenses. This is bad because if you can't afford this stuff now why would you think it will be easier to afford later. I am a realist and I know things happen. I can also note that for some strange reason things seem to happen a lot more to folks who do not have emergency funds. Some unforeseen stuff comes up that has to happen right away. Replacing a key household appliance is a good example. Lets say your washer goes out. You get a new one from Sears and finance it then pay it off over a couple paychecks. Not insane. [However what if something bigger happens. Putting a months worth of living expenses from some down time at work on a credit card could take forever to dig out of. ] However using consumer loans to get all new appliances you don't really need for the whole house is insane.
My observation is that people rarely get into consumer or credit card debt trouble because of using them to ride out an emergency. People get into trouble here by using credit to live beyond their means buying this and that and the other thing which they can't afford and almost certainly don't need.
Sometimes debt makes sense. It can be understandable and even a good decision. However do not forget that at the end of the day no matter how "good" debt is it's still a promise of money you haven't even earned yet. Use it responsibly and try to get out of it as quickly as possible.