Conflicting Views of Debt

Larry MacDonald’s piece on the Federal Finance Minister’s Task Force on Financial Literacy prompted me to read the task force’s consultation report. It contains little meat, but one area that struck me was the section on borrowing and debt. I tend to think of debt very differently from the writers of this document.

Here is how the report begins the debt section:

“Taking on debt is a normal — and, some would argue, essential — activity for Canadians. Most people, at some time or another, need to borrow money — whether it be to buy a home or a car, to start a business or to invest in an education. If this is done wisely — at competitive rates of interest, and paid off quickly — debt can be an intelligent strategy. “Good debt” has a number of benefits, including helping to build wealth, assets and credit ratings.”

People tend to feel better about poor choices that feel good in the short term if these choices feel normal. Overeating and over-drinking with friends is fun, but doing it alone is shameful. I think it is a mistake to teach people that debt is normal.

Here is my personal philosophy on debt:

“Debt is a crushing burden that weighs down people’s lives and dreams. Debt takes away choices. Taking on debt can be justified when the money is used for an appreciating asset, such as buying a house or paying for an education, but every reasonable effort should be made to keep the debt to a minimum. Avoid buying too expensive a house, and live frugally while attending school. Cars are an expense, not an investment. It is almost always better to get a modest used car you can buy outright rather than borrow for a more expensive car.”

So there you have two very different takes on debt. Choose the one you like. There is no doubt that the excerpt from the report is more in line with most people’s actual habits than my approach is. But that doesn’t mean they are better off piling up debts.