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| The Basics | Good debt versus bad debt
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When is it worth it?
"What we would normally consider bad debt can turn into good debt in certain circumstances," says Catie Fitzgerald, a personal-finance coach and registered investment adviser in Henderson, Nev. "If you use debt to buy a car that gets better gas mileage than your old vehicle, you could end up better off financially."
Bach considers auto debt a Catch-22.
"People borrow to buy cars before homes," says Bach, "and that's unfortunate. For most people, their first major loan is a car loan. That's guaranteed to go down in value. So you really want to borrow less. For example, instead of rushing out to borrow to buy a $50,000 BMW, you'd be better off buying a $25,000 car."
The best type of debt is debt that builds wealth over the long run, and the No. 1 example of that is mortgage debt.
"Home values have increased an average of 6.5%, per year over the past 30 years," says Bach. "So when you borrow to buy a home, chances are that's good debt. You'll build value."
Bach heavily promotes the idea of homeownership, saying that everyone needs to own where they live.
"About 40% of Americans are renters," says Bach, "and the fastest way to wealth in America is buying where you live."
Bach cites some shocking numbers to back this up.
"The average renter has a median net worth of $4,000, and the average homeowner has a median net worth of about $150,000."
Manning also emphasizes what a good time this is to build wealth through debt.
"This is the most advantageous time ever to be in debt," says Manning, "in terms of opportunities to get low-income loans or to renegotiate or refinance."
Duh, debt?
One of the reasons so many Americans seem mired in bad debt (Bach reports that the average American carries approximately $8,400 in credit card debt) is that financial education is virtually nonexistent.
"This type of common-sense stuff isn't taught in school," says Bach, "and most Americans don't realize how badly high-rate credit cards are hurting them."
Fitzgerald advises teaching your children the difference between good debt (debt that's used to buy assets that grow in value over time) and bad debt (debt that's used to buy things that will lose value) early on.
Gelb opts for a more hands-on approach. "Give your children an allowance (without strings) beginning when they're in kindergarten and offer them the opportunity to perform extra jobs around the house for money. Stop buying them everything and teach them how to make choices with their own money-buying decisions." The mistakes they make will help them learn and grow.
"People are getting in debt before they have a job," says Manning. "Education is important. We used to encourage kids to save, and that has been missed. Students now refer to their credit cards as yuppie food stamps. They see cards as entitlement and see they will be in debt all their lives."
Fitzgerald recommends teaching by example. Treat credit cards like emergency safety nets and your children will likely learn some money-management skills. "If you have to use your credit card, immediately revise your budget, paring back on nonessential spending. Allocate the saved dollars to a payoff plan to bring your debt balance down to zero as soon as possible," she says.
Larry Getlen wrote this article for Bankrate.com
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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