Good Debt and Bad Debt

Mortgages are "good debt", sure. But there are other debts that are good, too.

Good morning friends!

After Labour Day Long Weekend last weekend, you're forgiven if you found this week to have flown by. I hope you had four quick work days and are able to find some rest and relaxation over the coming weekend.

I found myself shaking my head a lot at Personal Finance Twitter this week. Perhaps it's because I'm following more folks who talk about personal finance. Perhaps it's because this is the topic my mind is glued to these days. Or perhaps there was just more said this week that I disagreed with.

(I'm going to chalk it up to that feeling you get when you're talking about a specific product with a friend you rarely see only to find that product pop up as an advertisement in your Instagram feed. No, Instagram is not listening to you.)

It's in moments of disagreement where one tends to feel imposter syndrome set in. I'm new to the game, and I'm young to the game as well.

(Today happens to be the 19th anniversary of 9/11/01. I was in Grade 5 when the attacks took place — I woke up that day to my mom crying in front of the TV and arrived at school to find my elementary school teachers crying as well. I suppose this de-ages me a bit, but like everyone else in the room, I will never forget that day.)

But while experience does matter in this field, it's equally safe to say historical methods, historical trends, and historical ideas do not make the future. 

A close friend encouraged me to embark on writing this newsletter simply because my ideas were different — the ideas provided (at least for him) a broader way to think about his current financial task at hand, and generally, having more information makes a decision easier than having less information.

More information is generally better than less information.

Words to live by.


You'll note I'm still figuring out a little bit of the format and layout of Toonie. This week begins with something I'd like to add to last week's email and then maintains last week's format. — JG

Quick Addendum to Last Week's Thoughts on Assets and Liabilities

Last week, I talked about some alternate definitions of the terms "assets" and "liabilities". I summed it up as such:

So, it’s an asset if: 

Earnings with asset + residual value - original cost - interest - selling costs > $0.00.

Or in real words: If earnings with the asset plus its leftover value are greater than what you have paid for it (including interest), it's an asset.

And it's a liability if:

Earnings with asset + residual value - cost - interest - selling costs < $0.00.

I want to quickly add:

Please keep in mind that "assets" and "liabilities" will be defined differently by professionals and financial institutions. Using the term "asset" inside the definition of a liability is a complete misnomer if you're talking to a professional.

I just believe it's easier to classify a purchase of something in your head if you look at "The Thing" and can determine if you're going to earn more money than you're going to pay out for "The Thing". 

Please don't try to convince an accountant of this definition of a liability. They'll almost surely laugh at you.

Quick Thought of the Week

There is a huge subscriber base to the F.I.R.E. plan (Financial Independence, Retire Early). Though I need to do some more reading on the methodology, I gather the idea is to make a lot of money in your early years, create enough wealth to provide yourself income without having to work each day, and retire at a young age to have all the fun and pursue all your dreams.

(I could be wrong — I'll read up more on this as we go.)

But given we human beings tend to live longer and longer and given we all need a purpose to wake up in the morning, isn't it also cool to have some fun along the way, pursue some dreams along the way, and retire at a regular age (like when you're body is physically not capable of doing the work each day)?

And if you hate your job so much that all you can think about is retirement in your 40s or earlier, isn't the remedy to find a different job?

I'm not sure I could build the legacy I want to build if I lived incredibly frugally now and retired in my 40s.

Link of the Week: A Squandering of an Incredible Wealth

This tweet may be one of the most heartbreaking things I've read in recent memory:

Update that family grandpa actually died at age 78 

He left them 110 doors 84 single family houses 16 apartment complexes No mortgages No liens 

Left to the grand-daughter They have 5 properties left All back taxes 

This insane 🤯

If I'm reading that correctly, a single individual inherited hundreds of cash-producing properties and has squandered the entire fortune. If you care to read through the entire thread on Twitter, it appears the fortune was squandered in 15 to 20 years.

Heartbreaking.

Good Debt and Bad Debt

I constantly hear the phrase “Well, at least a mortgage is good debt.”

I don’t agree entirely with that sentiment, especially since it’s such a common perception to have.

In theory, the only good debt is tax deductible debt. Which means the debt needs to be used to purchase an investment (like a rental property, or shares in a publicly traded company, or shares in a private company, for instance).

But in lesser theory, any debt that purchases an asset that yields a greater rate of return than the cost of that asset (including debt/interest costs) should be considered good debt.

touched on this last week when discussing the definitions of assets and liabilities. If you recall, it's an asset if:

Earnings with asset + residual value - original cost - interest - selling costs > $0.00.

And it's a liability if:

Earnings with asset + residual value - cost - interest - selling costs < $0.00.

So, if you take your home equity line of credit (which carries a low interest rate like, say, 2.99%) and improve your home (which carries an average annual rate of return of 7.31%), then the home equity line of credit is good debt.

If you go and purchase a vehicle on debt, and that vehicle has a rate of return greater than the amounts paid out to operate the vehicle (including interest paid on the loan), then I think that debt is still “good”, no matter how fast a vehicle depreciates.

(It’d be very difficult to measure your earnings with a new vehicle vs. your earnings with a used vehicle. I’ve had some construction contractors try to convince me having a new vehicle proves you’re financially stable, and so they’ve seen an uptick in the number of contracts they receive after purchasing a new vehicle. How a person would actually measure this, I’m not exactly sure.)

Plus, you can’t forget the residual value of any asset you purchase with that debt — or the value of the asset once you’re done using it. (Again, see last week's newsletter.) In effect, if you borrow $5,000 to purchase an asset and you can sell it for $2,000 once you’re finished with it, you only have to earn $3,000 (plus interest costs, which are very low these days) to ensure the debt is “good debt”.

I do believe consumer debt is bad debt. "Consumer debt", something we'll touch on more in the future, could be considered "expenses", or the costs of running your everyday life, or fancy clothes, or a fancy watch. Paying interest on groceries or for the latest shopping spree is almost never wise (the only situation that comes to mind is if you happen to own a clothing store). "Expenses" should be paid for in cash or on a credit card and paid off in entirety each month.

I also believe there is good debt, better debt, and even better debt. And I'd attribute those characteristics solely based on the rate of return of the asset you purchase. Essentially, the more you earn with the asset you purchase with the debt, the better the debt.

Debt is a tool. Debt costs something, but provides access to assets faster than if you were to save to pay for them with cash.

If you can earn more than all the costs associated with that asset if purchased on debt, then I think it’s good debt.


Thanks for making it this far. 

As always, if you feel so inclined, Toonie can grow just a little bit faster if you're up for sharing with a friend or two. It'd be greatly appreciated.

Have a great weekend and a wonderful week ahead.

JG