Bad Debt
Get rid of it.
I recently wrote a series on my blog about Dave Ramsey’s 7 baby steps to pay off debt. I have just three kinds of debt: a low interest rate tax efficient mortgage, low interest rate tax efficient margin debt, and no interest rate intramonth credit card debt. This is good debt. I’m happy to keep those forever. I never want any other kind. My after tax wealth compounds faster with them and I can pay them off whenever I want.
However, I’m lucky to have never borrowed money for my education, to have never had any expensive medical problems until this past year and I have plenty of health insurance for that, and to have a long-suffering wife who loves or at least tolerates me. If you have student debt, health emergencies, or a divorce, it is easy to get into debt. It is harder to get out of debt. Money compounds in both directions.
But there’s good news about bad news: newbie gains! There’s nothing that a lean person can do to increase life expectancy nearly as much as a fat person can by getting lean. There’s nothing a net creditor can do to risklessly compound wealth as well as a debtor can by getting out of bad debt. If you pay off a high interest rate card, you are getting a 20–30% riskless return which is better than I can find anywhere.
So obviously it is better to walk around a hole, but if you already fell in one, get out as fast as you can. Some specifics: if you have high-interest debt, replace it with this and get a $300 bonus just for getting a better loan to pay off the more expensive ones. If it is student debt, pay it off with this and get another $300 bonus (or $100 for private student loans). Doctors and dentists get a $1,000 sign up bonus here.
Caveat
Plan A is to never get any bad debt. But Plan B is to get out once you’re in it. And every problem is best addressed by facing the truth — even ugly truths, maybe especially ugly truths — directly.
Conclusion
Besides the most basic essential survival expenses, don’t spend $0.01 until you get out of 100% of any bad debt. You will be both happier and more effective once you do. Bad debt is very bad. This isn’t exactly good debt but it is okay debt and better than anything with a higher rate.
TL; DR
If you are paying > 7% on any debt, click here to reduce it (and get paid $300 to do so).
