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Good Debt...

Seth Godin (author of Linchpin, The Dip and other good books) wrote yesterday on his blog about good and bad debt, Trent at The Simple Dollar wrote a follow up.

Now, I respect a lot of the ideas Mr. Godin put forward in the Linchpin and do agree with Trent on a lot of the big ideas, but I disagree about there being a such thing as good debt. I think that there is no such thing as good debt, but that some debts are slightly less bad than others. I think under the right conditions, a mortgage makes sense; but, even then, it's debt. Whenever you take on debt, you take on risk. Moreover, the Bible tells us that "borrower is servant to the lender" (Proverbs 22:7). If your doing something that includes an element of risk with the money, like investing in real estate or opening a business then your only compounding your risk.

Seth's post opens with the statement:
Here's a simple MBA lesson: borrow money to buy things that go up in value. Borrow money if it improves your productivity and makes you more money. Leverage multiplies the power of your business because with leverage, every dollar you make in profit is multiplied.

This sounds like he's saying it makes sense to borrow to start a business, but some of America's greatest businesses Walgreens (one of the Good to Great companies), Panara Bread, Electronic Arts (alright, they aren't doing to well, but they don't owe anyone either), American Eagle Outfitters and Microsoft (until 2009) carry absolutely no debt. I know, your going to point out that they can afford not to have debt load, because they are rich. What's a small entrepreneur to do? Save money, start small and be Creative.

This also makes it sound like borrowing money for college is a good idea, but one of Seth other posts, just a few days earlier, make that sound like a bad idea. There is no guarantee that you'll be able to pay back the loans, or that your salary will increase enough to justify being beholden to a bank, or now the federal government. That said, I'm all for education, and think it's a worth while investment when you can afford it. What if you can't? Apply for scholarships, lots of them. This should take about the time of at least a part time job. Work and save. Don't rent an appartment, save money by living at home or in the dorms. Degree is more important than pedigree, unless you remain in academia for the rest of your life; what you know is more important than where you went to school. It will matter even less two years out of the gate when you have real achievements in the "real world" to hang your hat on. If you have children, start saving early.

Disclaimer: I have a mortgage, I have a plan for paying it back early, and have no plans to borrow any more money. I was blessed with a mother who could cash flow the cost of my education. I didn't know the dangers of debt when I started college, I made a credit mess but have cleaned up. Now, we were cash flowing the cost of my wife's education until the birth of our first child. She is staying home to take care of our daughter; but if/when she decides to go back to school we'll make sure that it is cash only.

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