Good debts vs bad debts

This is an extract from my book, The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Low to Medium Income.

Good Debts and Bad Debts

If you are borrowing to spend on something with no lasting value – a new car, a vacation, or a big night out – that is a bad debt.  If you are borrowing to invest in something that may offer you a long-term financial reward – a home, a business, or skills – then it may qualify as a good investment, one that is rational to take out on your path to financial freedom.

But how can you tell which is which?

Student Debt

It can make sense to go into debt in order to study if this will increase your income in the long run by an amount significantly greater than the debt incurred, including interest calculated over the total period of the loan.  You can use this tool to figure it out:

Carefully calculate whether the course offers a reasonable return on investment.  Weigh it up against worthy alternatives, i.e. apprenticeships, trade skills or other qualifications.  If it seems like it would offer a reasonable return in an area of strong employment, proceed with caution.

You may have been told that a college degree is the path to riches, love, family, security and glory.

This is no longer the case.

Previously, only a small percentage of people had a degree, which made it stand out.  These days, up to 50% of people in some countries go to university, which means you may now need a degree just to work in a post office, while a more prestigious job may require a master’s or higher.  As a result, some in-demand trades now offer higher average salaries than those obtained by people with less sought-after degrees.

When calculating the benefits of student debt vs future income, keep in mind that if a chosen profession might offer an annual salary of around $80,000, that does not mean you are $80,000 ahead per year.  If without the qualification you could make $50,000 per year, the total return on investment is only $30,000 per year.

Actually, it is less than that.  If you have to spend four years without working full time in order to get the degree, you are also missing out on that money you could have been earning, plus the returns from four years of investing your savings.

Unless you think your proposed course will leave you way ahead, be wary.

Look around for a less expensive school, i.e. a local state university or community college.  Are you eligible for any scholarships?  Is there a cheap online equivalent?  Also, try to pay as much upfront as you can.  Shop around for the best deal on a student loan you can find.  Talk it through with somebody before taking the plunge.  Be aware that your own parents might not be experts in this matter, because they grew up in a very different time.  And make sure you finish the bloody course or else you’ll be left with a debt and nothing to show for it.

There are careers counselors and others who will tell you to ‘follow your passions’ and ‘pursue your dreams’.  Well, that’s fine – up to a point.  Those who get into $100,000 of debt to become unemployable intersectional feminist dance therapists may find that their dream has turned into a nightmare.  Is your dream or passion feasible?  Do the math first.  And by the way, do you think that your career counsellor’s dream, when she was seventeen years old, was to one day become a career counsellor?  Probably not.  More likely she completed a useless degree, found she was not very employable, and ended up as a career counsellor because hey, it’s a job.

I know two such cases personally.

Of course, life is not all about money and careers.  We also pursue education in order to broaden our minds and exercise our curiosity about the world.  But how much is that worth?  Is it really better to rack up a debt of $100,000 before you’ve even started your working life, than to simply read a bunch of books?  Your choice.

A middle path might be to take a double-degree or extra subjects outside your specialization.  If you are studying electrical engineering and are also taking a class on film history, I reckon that’s fair enough.

As we will see in Step 4: Get Out of Debt, student debts have gotten completely out of control in the US, and the situation is often described as a bubble.  Some of these debts cannot even be released under normal bankruptcy laws as other debts would.  Be especially careful if you study there, or anywhere else where your student debt would end up being very high.  I recommend reading Aaron Clarey’s Worthless: The Young Person’s Indispensable Guide to Choosing the Right Major for more information about the dangers of accruing huge debts for useless degrees, and for which fields of study might be worth your time.[i]


Buying a house makes sense for some people in some circumstances.  It can be a good debt in that it is a form of investment, which we’ll get to in Step 8: Invest Wisely.  Here, however, we’re just talking about buying a machine for keeping the rain off yourself and your Pokémon collection.

Borrowing to buy a house makes much more sense than borrowing for a car because a car will rapidly depreciate in value whereas a house will hopefully increase in value over time.  Note that this is not guaranteed.  Proceed with caution.

Some people end up out of their depth with an onerous mortgage that consumes their lives and their future, and a few end up emotionally devastated if they cannot make the repayments and are forced to sell.  Consider getting a smaller house in a less expensive location to minimize borrowing.  Try to pay it off as quickly as possible.  We will reiterate these matters in much more detail during the property section of the chapter on investments.


Borrowing to establish or expand your own business might be a wise investment.  I cannot give you specific advice for your business – you know it better than I do – but here are some things to think about.

Would it be possible to start off without borrowing, by saving up cash first?  Would it be possible to borrow less, say, by starting out small-scale, on a shoestring budget?  If the business starts working out and you are making a profit, you might then reinvest those returns in order to expand, instead of borrowing.  See what you can do.

Essential Items

Sometimes you really need a consumer item straight away for employment or life in general, before you have time to save up for it.  Such items might include a car (if your workplace is out of bicycle range and public transport is impractical), a suit, a phone, or a computer.

In such a case, borrow as little as possible.  Pay as much from your own savings as you can.  Don’t get an awesome car – you can’t afford it.  The fact that someone would happily lend you the money does not change that fact.  Get a secondhand car, the cheapest you can find without compromising on reliability.  Tell the ladies you bought it because it belonged to James Dean before he was famous.  Yup, he drove a Kia.  Few know this.

As for other items essential for work, borrow as little as possible.  Look for the cheapest phone that will do the job.  Same for computers.  There are inexpensive brands that are not great, but kind of work.  Think ASUS.[ii]

I wonder if ASUS is going to offer me a sponsorship deal after that effusive praise.

Need a suit for an interview?  Check out discount or second-hand stores.  Target is not your enemy.

Don’t kid yourself about whether you really need the item or not.  Do you have an old, dorky car that still runs?  You do not need a new one.  Do you have an eight-year-old laptop that still has just enough memory to allow software upgrades?  Don’t buy a new one until this one dies completely.  The same goes for your phone.

Getting a Good Credit Score

Some people will tell you it makes sense to use credit cards and to pay off the balance in the interest-free period because this is inexpensive or free, and raises your credit score.  This is good advice.

For some people.

If you can handle the discipline of using a credit card in this way, and if you plan to borrow money for some sensible reason in the future, i.e. a house to live in, this might be a rational plan.  It would reduce your overall borrowing costs, which is good.

If you doubt your ability to handle a credit card in this way, or if you have no intention of borrowing in the future, I would suggest that you forgo the temptation.

You do not need a credit card.  I am forty years old and have never owned one.  There are other freaks around like me – in fact, almost a third of US households don’t use one.[iii]  For those with a tendency to get into trouble with debt, cutting up the credit cards and using only a debit card might be the best move you can make.




End of sample.

To learn more about reaching financial freedom, buy my book:

The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Low to Medium Income

Also available on many other platforms.



  1. dickycone · August 5, 2020

    How do you buy plane tickets without a credit card?


  2. dickycone · August 5, 2020

    Right, I’d forgotten about debit cards because I’ve never used one. I buy everything with a credit card, but I just consider it a substitute for having to carry cash around and touch cash (I’m a little bit of a germophobe) and I pay the balance off every month. At least in the US, you can usually get a card that gives you 1% to 2% cash back on purchases, so you make a few hundred dollars extra a year as long as you always pay off the balance.


    • Nikolai Vladivostok · August 5, 2020

      You’re one of the ones better off with a credit card. Others are hopeless and should stay away from them for their own safety.

      Liked by 1 person

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