Ask a CFP: ‘Is All Debt Considered Bad Debt?’

This post originally appeared on LearnVest.

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In the “Ask a CFP” Q&A series, LearnVest cedes the floor to a Certified Financial Planner™ who will address some of the trickiest money topics out there. 

Matt Shapiro, a CFP® with LearnVest Planning Services, explains why there’s some nuance to categorizing debt.

‘Debt’ can be a scary word.

But it’s an even scarier reality for the 28% of Americans who owe more on their credit cards than they have in emergency savings—or the 35% with past-due bills in collections.

Those numbers paint a pretty grim picture of our country’s debt situation—one that leaves a lot of people wondering:


Why So Many People Ask This Question Anyone can tell you it’s not a great idea to go into debt in order to pay for your summer vacation.

But what about a study abroad opportunity to conduct research? Or if you’ve saved up to purchase a two-bedroom bungalow—but can’t afford to swing an all-cash offer?

In such cases, knowing what’s a smart money move—and what’s not—may not be so straightforward.

What I Tell Them Not all debt is bad, but most of it—like credit card debt, personal loans and payday loans—is.

That’s because, in these cases, debt is often a symptom of poor budgeting and living beyond your means.

But mortgages and student loans are a different story. When carefully considered, going into debt to buy a home or pursue an education can be a good idea in the long run—potentially benefiting your family, furthering your career, and even increasing your income.

It all comes down to whether you have a financial plan in place to help minimize that debt.

For example, I urge clients to buy houses they can comfortably afford after putting down a full 20%—and only take on a payment that’s equal to or less than their current rent.

Sizing up student loan debt, on the other hand, can be a bit trickier.

Generally speaking, an education is one of the best investments you can make—because it’s an investment in yourself. But loans become problematic when borrowers fail to consider whether their choices will yield a good R.O.I.

RELATED: Calculating College ROI: How to Tell if You’re Getting the Best Bang for Your College Buck

To find out, I recommend answering a few questions about the costs and potential gains of further schooling: What’s the salary for people who graduate with your desired degree? Will that income be enough to cover your monthly loan payment? What are the university’s statistics on how long it takes graduates to find jobs?

Getting to the bottom of these questions can help you decide if taking on student loans is a smart financial bet.

Bottom Line Consumer debt? Do everything you can to stay away from this bad form of debt.

Going into mortgage or student debt as an investment in your future? That can be ‘good’ debt—if you think before you spend, weigh your pros and cons, and devise a plan to get back in the black.”

RELATED: Real People Dish: The #1 Thing That Inspired Me to Get Out of Debt—and Stay Out

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.