Personal Finance: There is no such thing as ‘good’ debt

Most adults have been in debt or are currently paying off various loans. There’s a small percentage of people who have never gone though the process, so most of us know how it on ‘this side’. We get loans for cars, houses, school, to pay for a business, to spend money on holidays, on clothes shopping, a new gadget, to pay medical bills etc. Some of the reasons might seem more frivolous, while others are really ‘life and death’ situations that we have to take care of, hence the idea that some debt is ‘good’ and some is ‘bad’.

Before we go further to discuss this, I’d like to share with you my personal debt story.

Back in 2003 if I recall it correctly I had a really serious need for a good computer. My PC was falling apart and learning web design was almost impossible, now that it would freeze at least 4 times/hour. I was passionate about running web sites (have started my first one a year ago) and wanted to learn more. Little did I know that this hobby will eventually turn into a real business, all I cared about what to learn as much as possible and my computer was doing everything to mess with me and my ‘mojo’.

So I took a loan.

The new laptop had some excellent specs (and I chose it to be a laptop and not a regular desktop computer, so that I can benefit from its mobility, too) and cost me 1000 Euro. My salary was around 200 (we’re talking Romanian wages, please don’t fall off your chairs yet), so I’d have to really save for it (which I wasn’t inclined to do back then, especially since a loan was soooo easy to take). The deal was that I’d pay the money in 36 months. I was lucky enough to have FIXED payments, so no worries about my interest going up and I knew exactly what I had to pay each month.

I could consider this to have been a ‘good’ debt, since I didn’t purchase a plasma TV or some clothing, but a ‘tool’ that actually helped me a lot. Having a good computer that would run perfectly allowed me to hone my skills and be more productive. After a year since I got the loan, my laptop was clearly paying for itself. I had people get interested in my services and they would pay me to create their web site design. In retrospect, I could have ‘sped up’ the payment (could have paid it in under a year), but there was no advantage for to me to so, not to mention the bank would have taken some commission from me, because I’d pay it off earlier (don’t ask, some of our banks really are not run normally here).

I used the laptop for more than 6 years and it earned his value tens of times, the ‘passive income’ it would get me has paid for some home improvements, new electric appliances in the home, setting up my ‘real’ business (and a lot of taxes), even the down-payment of my car.

As you can guess, we’re getting now to my second loan – for a car.

My small side business was doing OK. I didn’t earn too much, but I did supplement my income every once in a while. I’d lug  my laptop from one side of the city to another and started feeling insecure with it on the buses. The bus line that ‘takes’ me home ends up in a gipsy neighborhood and I was dead scared I’d get robbed (not impossible, looking at the people I shared the bus with). It was just a matter of time. I chose to take a cab, but this was pretty costly too, so the need of a car was pretty evident.

It would have made sense to get a second-hand car, but in my country they were very expensive because of the many car ‘dealers’ who’d flip them. On top of it, getting a decent one from Germany from instance (which many Romanians did), wasn’t such a great idea, because of an idiotic tax our Government just set: it was called ‘the first registration tax’ and it really messed things up for people like me, who wanted a reliable used car from an European country. I started making all kinds of calculations and it turned out that, to get an used car (at around 2-3K Euro) would cost me 2K more just to register it. Now that was really messy.

I have some neighbors who got a bank loan to get a better car and they paid 7k for the car (taken from Germany), the registration costs in Germany (plus driving to and from there) and the dreaded tax here. It came to cost them around 10K. It was a 50k miles USED car (7 years old) that could have been purchased NEW here at around 12K Euro.

Knowing that I don’t have this money and really didn’t feel like ‘gifting’ the State such a big chunk of my hard earned dough, I decided to save 3K for the down-payment and take a loan. My previous debt experience was also great and I thought in my mind that taking a 4 year loan for my car was a breeze.

This is my car. It cost me 13K euro (paid in 4 years) and the down-payment. I also had to pay around 50 Euro/month for a premium insurance the bank was forcing me to have. It was costly, if I had the money I’d have gotten it at 60-70% of the price. But I didn’t have the money and saved just enough to be able to take the loan.

It was another ‘good’ debt, since it helped me and my family move around easier (we didn’t have any cars till then), I didn’t have to worry about being robbed and didn’t have to pay a small fortune to the cab companies just to get to my clients or to job.

And then it all went to hell.

I started the car loan re-payment in April 2008. It was a pretty serious chunk of my salary (stupid, I know), but I was also earning some money off my web design business and thought things can only get better. The problem with life is that it does throw you a curve ball when you least expect it. Fast-forward to July 2009. I was correctly paying off my car and counting the days till it would become all mine. A phone call came from the main radio station (we were a local studio) and we were told the local station was closing down and we won’t have a job anymore.

We were speechless. Some of my female colleagues started crying, the males were livid. We were all adults there (30+ old), some with families and loans (I wasn’t the only in this position). It was clear that our industry (mass-media) was dying in our city and this was the ONLY station that hired and could pay some decent wages. And now this was closing down and we had absolutely nowhere to go.

The first call I made was to my accountant (I had established myself as a small .ltd and we have to hire accountants) to move my benefits from the radio paycheck to my company. Which company was earning me zilch, since I was earning enough at the radio and didn’t care too much about getting a lot of web design clients. So here I was: in debt, having to pay taxes, having ZERO savings.

Let’s say the next 3 months were difficult. I furiously started working as a freelance web designer, taking any jobs I could on Elance. I was working 14 hours/day and my health took a hit too. That autumn I had to get a biopsy to see if I was suffering from breast cancer or not. It was the lowest point in my life and only my determination to get out this mess helped me through. My family decided to help me pay everything I needed help with (food, electricity, the internet etc.) while I put all my earnings towards my taxes and my debt. Fortunately the biopsy came negative, so at least I didn’t have to deal with such huge health issues.

Little by little, my small business started building up. My clients were ecstatic and providing me rave reviews, which made more clients want to work with me. I was able to raise my rates (so that I didn’t have to work almost all day long) and slowly pay off my debt.

I WAS LUCKY

That’s all I can say. Even if it all seemed to be out of any control back in 2009, I was lucky in many ways: got good advice from successful freelancers to just try and grow a business, got lucky health wise, got lucky to have amazing clients who understood that my work deserves a decent pay, lucky to have such a wonderful family who supported and encouraged me, lucky to have a partner who, even if he was angry at me for taking on the loan, never stopped telling me that I WILL MAKE IT.

My car was paid off entirely until March 2012 and I have been debt-free ever since. I save money now and would NEVER put myself through this nightmare ever again.

I could say my debt was ‘good’. Both items actually helped me and my family. The laptop kickstarted my small business and the car even got me clients (placed some decals on it to promote my portfolio and had people call me to ask for a web site design). And yet the entire process left a bad taste in my mouth. For me debt is bad because:

• you are stressed – having to pay EACH MONTH money to someone is not easy. I was always a sound sleeper, but believe me my nights are better now.
• it’s risky – we all think life will get better, but it doesn’t. Having debt meant I couldn’t recover as fast as I would have from losing my job. Not to mention that, if I couldn’t pay it anymore, I’d have lost my car, my initial payments and had to pay more (if the bank tried to sell it and didn’t get enough money). I can’t even imagine the mess.
• you’re not working for yourself – I have friends who have taken various loans and, when we talk about money, they tell me “I have to pay the bank”. They don’t pay their loans, they pay the bank. It’s awfully frustrating to get a paycheck and, instead of planning the money for YOUR needs, to have to first pay .. the bank.

I think back when I started taking the loans and kick myself for not saving. I didn’t have huge expenses (my family helped a lot, so I could have saved even 70% of my paychecks), I didn’t have a family, and yet I just squandered money. When I had to really make an effort, I chose to take a loan, instead of getting my act together and budget.

This is my experience with debt. I don’t think it’s ‘good’, even if you’re paying off a house or your college education. Sure, it’s a difference to take a loan for breast implants or to provide a home for your family, but the end result is the same: you owe money. You stop being able to make plans, you stop being able to take on various opportunities. You’re tied to the damn bank, you’re scared that, if anything happens to you, the mess you’re in now is just the beginning. Anything can turn your finances upside down, you don’t have the joy of being able to budget your money for YOUR needs, you’re just paying the bank each and every moth.

What’s your debt story? Do you consider you made a mistake by taking the loan(s)? Have you paid it off yet? Are you close to?