Is All Debt Bad Debt?

There are different types of debt, and it’s easy to try to lump debt into two distinct Wizard of Oz witch-like categories: good debt and bad debt.  Debt can't be that bad for you, right? Everyone does it!

Well, I think debt is lousy. I don’t say that from some moral high ground—I’ve carried debt before. No, it goes far beyond that. Debt:

1. Takes away your cash
2. Kills your creativity
3. Blocks opportunity
4. Is a losing game

Any Debt Can Be Bad Debt 

Let’s look at those reasons more in depth:

 1. Debt Takes Away Your Cash

Debt steals the best kind of money—cash. We talk about the first rule of YNAB: Give Every Dollar a Job, but with debt, you can’t actually budget every single dollar.

“No way Jesse! I’m budgeting dollars to spend on my debt!” 

No, you are budgeting your dollars to spend on debt, and that debt was used to buy something else entirely years before. Maybe it was an auto loan for buying a car—and now that car is worth far less and you’re paying for the fact that you didn’t have the cash up front. It’s expensive! 

I don’t care if you have 0% interest or not. This isn’t actually about the math—it’s about the psychology of money. People say you could earn more money in the market, which is true, but how many of those people are actually doing that? No one does that—they just use it as an excuse to why they’re not paying down their mortgage. That’s what really happens. 

Debt makes it harder to save money or to allocate it to something that aligns with your current priorities. 

Old Debt Takes from Today’s Priorities

If the First Rule is to give every dollar a job, you cannot give every dollar a job because some of those dollars are being swiped off the top for credit card debt, student loans, cars, a house—the list goes on. Granted, a house is the most palatable form of debt—but speaking as someone that has lived with a mortgage, without, and then with, and then without again, I love living without a monthly payment. I just love it!

At any rate, you should hate debt because it takes away the cash, and cash is exactly what you want to budget. It’s horrible to budget when you can’t budget all of your money. It’s just not fun at all.

Check out our comprehensive guide about how to get out of debt.

2. Debt Kills Creativity

Debt kills the idea of scarcity. Yet it’s the constraints provided by scarcity that breed the best kind of creativity. 

My First Hand Experience

When I was 22, I was under the correct (but unpopular) assumption that I would not borrow money for school. It was a “bad” thing that I shouldn’t do—it was an absolute non-negotiable. I would not borrow money for school because to me that was bad debt.

We also had another non-negotiable. As we were expecting our first child, my wife Julie was very, very excited to focus completely on raising this brand new baby. 

So we were pitted against two things: Julie wanted to stay home, and we didn’t want to borrow money for school. 

I’d been running the numbers out—we’d been budgeting with this little spreadsheet, and I’m looking and seeing, 'Okay, we’ve got this pile of money saved. Could this run us for another two years until I can get my job, increase my earning potential, and we can be done with school?' No, it cannot, we’ll run out. 

I was kind of mad, because we’d been living very frugally. I felt like we’d been doing everything we could, but here we were with two non-negotiables and not enough money to make them both happen. For Julie to stay at home and for me to get through school debt-free, we were short about $350/month. 

Now, if I had said, “Well, why don’t we just borrow a little bit? People around me—they’re borrowing a lot more! I just need $7,000—that’s downright reasonable. I’m going to get a job. I’m going to be working as a CPA. We’ll pay off those loan payments very quickly.” It would have been so normal, so easy to justify—but it was a non-negotiable.

Non-Negotiables Can’t Be Squishy

When you have non-negotiables, they have to be non-negotiable. They can’t be squishy at all. When you butt up against a non-negotiable, it’s a constraint. Constraints breed creativity, and debt kills those constraints. When borrowing money is an option, your brain will not figure out another solution. It’ll just fall into that easy, normal, sickening default to just borrow your way out. 

I could’ve solved my scarcity issue by borrowing $7,000. I thought, everyone else is borrowing a lot more. You’re still very savvy. You’ll be just fine. You’ll be able to pay it off in a year or two. The interest rate is low. It’s practically free. No. It was a non-negotiable for us.

Constraints Unleash Creativity

That constraint led my brain to come up with another solution. This little rinky-dink spreadsheet that Julie and I were using to budget, maybe we could sell it. All we have to do is make about $350 a month. That was the solution that my brain landed on. Constraint is how many small businesses are born. 

And now, many years later, we have YNAB as you know it. I have the best job. It’s feeding my kids. We have a nice house. It doesn’t even have a mortgage on it. What more could you ask for?

The other direction would have been so normal to say it’s just a little bit of debt, it doesn’t matter. But it was a non-negotiable. That constraint is what created the environment where my brain could just unleash. And my brain’s not special, I’ll tell you that right now. I’m not the smartest. I’m not the best looking. I’m not the most creative. I’m not the most disciplined. I’m not the most anything. But when you put your brain between some non-negotiables, it will find a solution. 

When debt is the default solution, you never give yourself the opportunity to ever try anything else. That’s why debt is so dangerous—it’s robbing you of your creativity and you don’t even realize it.

3. Debt Carries a High Opportunity Cost

Most people live beyond their means. But when you live within your means, this creates a gap between your expenses and your income. That gap is opportunity.

Your Opportunity Gap Closes With Debt

When you’re borrowing money, you do not have that gap. Quite the opposite—you’re overextending. And when you overextend, your gap for opportunity closes.

Any new expenses that you’re adopting—a new subscription, a car payment, a boat payment, whatever it is—these things are closing your gap. But we want that gap to be as big as possible. That opportunity gap—the difference between what you make and your expenses—that’s the area where you can take risks. There’s freedom there. 

Debt Makes Risks Off-Limits

Maybe another job comes along that doesn’t pay as well upfront but has some good upside on the back end—when you live within your means, you can entertain that possibility. If you’re living beyond your means, that new job that comes along isn’t even an option. Your expenses don’t give you the gap for that kind of risk.

Or in my case—you have an opportunity to start a little company, where all you need is $350 per month. Making an extra $350 a month was palatable.  If I had been living in a way that my expenses were higher—say I needed $1,000 a month instead of $350 a month—that’s a little less palatable. I don’t think I would have even entertained it. 

But because I only needed $350 per month because our expenses were so low, my gap was so much less. The opportunity didn’t have to be this big grand thing. All I had to do was fit into that $350 per month mold that I had. It was perfectly acceptable to say, "Well, yeah, I think we could sell one spreadsheet a day and cover our shortfall." If I needed $1,000, or $1,500, or $2,000—no way!

You Lose the Freedom to Weigh New Options

Debt allows you to have a lifestyle that you’re not able to afford yet. That puts you in a situation where you don’t have cash—and say you’re 28, or 38, or 48—and you can’t spring at a job opportunity or an exciting move. You don’t even see the opportunity come at you because you can’t afford it. Debt has stripped you of that freedom to weigh new options. 

That’s why I think most debt is bad debt. It blinds you to opportunity after opportunity because you cannot afford the risk. Losing the ability to take a risk, what could be costlier than that? 

4. Debt is a Losing Game

The fourth reason why I hate debt is external to you. The first three are good enough reasons but the fourth is the corporations. Now, I know that people think using credit cards is the smartest thing ever. They think they’re winning. They think that they’re earning these points, getting free flights. 

The fact of the matter is your creativity has been annihilated by corporations. Why? For extra airline miles? Well, I don’t think that’s a good trade-off. I just don’t think it’s good at all. I think it’s robbery, or downright close to it.

Now, I love capitalism. Love it, love it, love it (with checks, obviously)! I’m not going to say I’m mad that this large bank is trying to make a profit. I would never begrudge someone trying to make a profit, honorably. And we could debate honorably all you want but I’m not going to begrudge someone that’s trying to make a profit.

So the banks, they’re going to make a profit—they’re so smart and they have so many resources. This gives them the upper hand. You are nothing to them. Nothing! They will squash you. They don’t even know you exist. All they want is to just get a little cut of that transaction. 

Corporations Are Winning

Do you really think those banks have orchestrated this massive credit card game, where everyone is playing and the banks are losing? Yet, the banks created the game. You might think you know how to play the game and know how to win. No, you don’t! You don’t know how to win. You’re losing. You’re playing against someone that has made all the rules.

I know that the corporations are winning. How are they winning this game? They’re winning it because every time you swipe your card, they make money. Every single time!

You’re playing against someone that has made all the rules.

So if you want to say, “No, no, Jesse! You don’t understand. I get points for this and that”... yeah, whatever. The corporations are earning far more than they’re paying you. You really think they would orchestrate this entire game so that they would lose money? Whoever in the history of the world has ever voluntarily said they would like to lose money? Nobody! But we play a game where we all lose. We’re all losers in this. All of us, collectively. Merchants pay more, so we pay more. Merchants are squeezed on their fees, so we pay more.

Your Debt Lines the Pockets of Massive Banks

The only people that benefit from the game are the banks. That’s another reason I hate that people use debt—they’re just lining the pockets of these massive corporations and banks. It’s fantastic that these companies want to make a profit. However, I don’t like it when everyone else is suffering as a result. And I mean suffering in the real, real sense of the word. People are losing sleep. Marriages are being broken up. Creativity is being annihilated. People can’t budget because all their money is already spoken for. It’s all because these big corporations want to make more money. More power to them, but I say, let’s take a little bit of the power back. Don’t play the debt game.

Whew, I got a little doom and gloom there at the end, but really—all debt is bad debt because it limits the life you want to live. If you want to see how my rinky dink spreadsheet has grown to help hundreds of thousands of people gain total control of their money, you can try it out for free for 34 days. No credit card required!

To listen to the original episodes from my podcast, check out the four-part series below.

• Why I Hate Debt Pt. 1: Cash
• Why I Hate Debt Pt. 2: Constraints & Creativity
• Why I Hate Debt Pt. 3: Cost of Opportunity
• Why I Hate Debt Pt. 4: The Corporations‍

Feeling inspired to pay off debt? Try YNAB free for 34 days and build a financial future you feel great about.

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