So if debt isn’t all bad, how do I use it? As I mentioned last time, our financial system literally runs on debt. A consequence or emergent property of that system is that certain things become more and more reliant on debt, by necessity or convenience. (I can elaborate why if that’s not obvious to you.)

I was going to do one post on this, but that ain’t gonna happen. For the first post I want to talk about the general categories and some general thoughts on those general categories.

Big ticket items are the ones people most obviously associate with the debt discussion. Homes, cars, and higher education are the main examples. Homes are obvious candidates because they are the collateral for the loan. If someone defaults on the loan the bank will take the home back at little loss overall. Cars are in a similar situation but don’t hold their value as well as homes. School loans are on the list only because of rapidly rising costs. And because there’s no collateral they are riskier for the lender – I suspect that’s a small part of the reason the government took them over.

Could an ordinary person afford any of those without a loan? No. Even with years of practicing the mainstream anti-debt advice, ordinary folks would find this task difficult at best. The average home far exceeds the annual median household income – you’d be saving your whole life to live in your own home. Same goes for going to college.

Credit card debt is the only kind of debt that’s actually “bad.” It’s bad for two reasons – really high interest rates and because it’s a sign you’re living beyond your means. That said, sometimes credit card debt is the only way to pay for a big unexpected repair or medical bill. Here’s my post on saving for how to help prevent that.

Investment debt is how you usually make “safe” investments that produce dividends/interest. Government bonds, local government bonds (called municipal bonds), and corporate bonds are the big ones. This is debt – but you are the lender! Buyer beware, the bond market is in bubble territory right now (a discussion for later in this series).

CDs and bank accounts are also forms of debt where you are the lender. The bank uses your cash to lend out to others, leaving bank credit in its place (just a fancy term for IOUs). These are insured up to $250K by the government – but banks are allowed to take your deposits in times of crisis if they can’t meet their cash to debt ratios. That nearly happened during the financial crisis; the Fed/Treasury decided to print more dollars instead (by issuing bonds!) which they gave to banks to keep them solvent. (The Fed is run by those same banks…)

That covers each of the general categories. More on all of these in future posts.

Next up, buying cars!