The Good Debt versus Bad Debt Myth

July 16, 2013 pwm1

There is an old axiom in finance that says debt can be divided into two categories: good and bad.  As the saw goes, good debt is “invested” in something that should increase in value and have other favorable attributes, such as deductible interest; a home, for example.  Bad debt is all the rest, such as credit card balances.  This cavalier way of looking at personal debt has led millions of families to the brink of financial insolvency.  The truth is that ANY debt should be considered a negative; something despised; at best a “necessary evil” (such as a business loan) to bury as soon as possible.

The goal is to be debt free, whether we are talking about a family or a company or even a country.  In the best of times, debt is a drag on success.  In the worst of times, it can be the ballast that sinks the ship.  It must be our overriding drive to produce enough free cash flow and have enough retained earnings to fund our projects–whether that involves expanding our business or assuring a certain quality of life.

MSH


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