Is All Debt Bad?

The short answer is no.

But before talking about why, you need to know that there are two kinds of debt --- productive or non-productive (also called consumptive debt).

Let’s talk about productive debt. This is debt that can generate income or gain in the future (hence, productive).

For example, taking on debt to expand your business. Assuming that your expanded business will make more money in the future, then this is productive debt. Another example is a mortgage or debt to buy property. The assumption is that property prices will rise in the future and that when you sell your property 10-20 years from now, you can get a higher price than what you paid for it (also called capital gain).

The second kind of debt is probably more familiar to us. It’s called consumptive or non-productive debt. It’s when we borrow to buy things like:

- a new car for personal use

- or a widescreen TV

- or a new pair of sneakers

I guess you know where I’m going with this.

It is non-productive because the moment you start using it (or even take it out of the store or drive it out of the showroom), it already loses monetary value. You cannot sell it for higher price than what you paid for it.

Remember that both productive and consumptive debt has inherent risk. That is, the risk of not being able to pay off your debt and losing your asset as a result.

For example, you took on a loan to buy a property, but after paying off the down payment and some monthly installments, you suddenly realize that you can no longer afford it. Once you stop paying the installments, you automatically lose your down payment, installment, and the property itself. In this case, the down payment and installments, which were your assets, are now lost because you are unable continue paying the installments.

So back to our original question --- not all debt is bad, because productive debt, when used and managed well, can help us acquire assets and provide for our family’s needs.

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