Suze Orman Explains Good Debt Versus Bad Debt
Wondering if you’re in good debt or bad debt? Suze Orman - author of Women and Money - explains it here, in a nutshell.
This woman writes to Suze Orman in the July 2008 issue of Oprah Magazine, and says that she owes $20,000 on her credit cards, has a $165,000 mortgage, has car payments, is paying off a home equity loan, and “lives life to the fullest.”
That is, she takes the kids to water parks, museums, the YMCA and Disneyland regularly. She’s still overspending - and she doesn’t see what’s wrong with it. “What’s so wrong with being in the red?” she asks Orman. “We live paycheck to paycheck, but we’re happy.”
She’s wondering about good debt versus bad debt, and Suze Orman’s here to explain the difference between good and bad debt.
Suze Orman Explains What’s Wrong With Bad Debt
“Debt itself isn’t bad. It’s the way you choose to handle it that’s mind-boggling,” says Orman to this lady in red. “If you care one iota about your kids, you need to start caring about money. I wouldn’t be surprised if they end up financial disasters because of the example you’re setting.”
Orman says that not only will this mom not be able to help out with her kids’ education (which I personally don’t think is a big deal - I took out student loans and worked my way through university) - but this lady will probably end up on the kids’ doorsteps when they’ve grown up, because she’s hasn’t saved for retirement. That’s how good debt versus bad debt works.
Suze Orman Explains Good Debt Versus Bad Debt
“Knowing the difference between good debt and bad debt is the key to financial well-being,” says Orman.
Good Debt:
- Is money borrowed to purchase an asset: homes or mortgage, education or student loans, etc.
Bad Debt:
- Is money borrowed to finance a “want” or a depreciating asset: cars, credit card balances, home equity lines, etc.
If you’re financing a car, Orman suggests a 3 year loan - no longer. She also says that leasing doesn’t make sense because it keeps you perpetually in bad debt. Plus, living paycheck to paycheck just doesn’t feel good. It’s a source of perpetual stress.
If you’re like me and wondering if a bachelor’s degree was worth it - you can celebrate! Suze Orman says, “Census data pegs the average lifetime earnings of a high school graduate at a million dollars below that of someone with a bachelor’s degree.”
Those statistics obviously don’t include freelance writers. I definitely don’t earn more than high school graduates even with my degrees, but do I complain? Maybe sometimes, but only a little. 
If you found Suze Orman Explains Good Debt Versus Bad Debt helpful, try:
Comment by jimma on 19 September 2008:
If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership’s lot and it’s downhill from there. Too many people shrug off a car payment as a necessary evil.
Comment by Laurie Pawlik-Kienlen on 19 September 2008:
I drive a 20 year old Acura that’s definitely seen better days — but I bought it with cash, and pay only a few hundred dollars a year for car insurance. Paying off a car is only a necessary evil when you really can’t afford to fork out $1,000 in cash to buy one — and you really, really need to have a car.