When is debt good and when is it bad?

Save, Invest, Give

In this episode, Adam Nash answers when debt is good and when debt is bad. Since 2017, Adam Nash has taught “Personal Finance for Engineers” at Stanford. He's covered topics from compensation, investing, to real estate. He’s the Former President and CEO of Wealthfront, Former Vice President of Product & Growth of Dropbox, and on the Board of Directors at Acorns. He’s currently the CEO and co-founder of Daffy, a not-for-profit community built around a new, modern platform for giving.

Today's question is about personal debt.

Asking my opinion of personal debt and when is it good or bad? The short answer is I don't think that people should think about debt as good or bad, but think of debt as a financial tool that is very powerful and sometimes dangerous.

Remember in this country that every year, millions of people file for bankruptcy.

And bankruptcy is literally when you have debts that you cannot pay back.

And so it's good to look at debt carefully and when does it make sense? In the United States, the four most common types of debt are mortgages, loans to buy houses, student loans paying for an education, auto loans to pay for a car, and of course credit cards to pay for, well, just about anything.

And these types of debt are very different.

Mortgages, for example, are a very helpful form of debt because for most people financially, not only could they not buy a house if they had the money, but even if they had the cash to buy a house, financially they'd be better off borrowing the money at a low rate and keeping that cash available for other investments and things in their life.

So when is it good to take on personal debt? Well, first of all, you have to do it sparingly.

You have to do the math and make sure that you can afford to pay off that debt.

And second, you only wanna use debt when you're using it to subsidize an investment that will increase in value over time.

You expect a home to increase in value over time and you expect your income to increase over time from an education.

But many people just use credit cards to buy things that they can't afford today and basically borrow that money from the future.

And that's how most people get into trouble with debt.

Thanks for watching.

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Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.