Yes.. I mentioned the “D” word. Debt. Just letting that word roll off your tongue makes you feel like you have halitosis.

Well, get that tongue scraper and Listerine out, because as surprising(and somewhat crazy) as this may sound, there is such thing good debt AND bad debt.  And you might want to keep the good debt around longer (that means instead of paying off the good debt first, pay off the bad debt first) because there are some benefits to good debt unseen by the naked eye.

What can good debt do?  Good debt can help you decrease your taxes you owe to the government, and it’s especially better for you if you’re in the higher tax brackets.  If you’re not taxed to the nines by the government, then good debt is not as fantastic as if you were in the 46% tax bracket.

What does bad debt do? Nothing. It just gives you a bad feeling and an ulcer.  It just sits there, grows interest while you tread the deep end trying to keep up with the payments.

Here are some examples of good debt.

• Student loans from the provincial or federal government
• Mortgage on an investment property
• Lease payment on a car (max $800/month as per the CRA) that you use for work (by that I mean that you can claim capital cost allowance on your car- you need to HAVE to use your car for business)
• Interest on any money you borrowed to generate income (can be for investment income too)— but note the key word GENERATE INCOME.  If you’re borrowing at a rate of 7% and your stock market returns are only 5% then… that’s not called generating income.

Here are a few examples of bad debt.

• car payments if you only use your car to commute/ can’t write your car off for tax purposes
• principal residence mortgage (many people think this is good debt, but if it doesn’t really do anything for you, then it’s not good, really… and you can’t bank on the home value to rise consistently)
• credit card debt (always a bad debt, no ifs, ands, or buts!)- it’s 18-21% interest– YUCK!

Okay here’s an example of how it might look:

Let’s say you just graduated school one year ago and have $10,000 in student loans to repay.  Let’s also say that you netted a nice job as a fresh graduate making $50,000 (in the marginal tax rate of 29.70% in B.C.).  If you don’t pay any tax because you don’t have a high paying job yet, then ignore all this stuff about good debt, because good debt only gets you tax back.  If you don’t pay tax, you don’t need to get any tax back. You also have a car loan to pay off (about $500 a month), but because the $10,000 is such a big number and you want to get rid of your student loans, you try to pay that down first.

Scenario 1: Pay down student loan first by paying $1000 a month- let’s hypothetically say the interest was $100 a month, and paying $500 to car payment.  Let’s say the yearly interest paid hypothetically for the car loan was $200.

So the yearly interest paid for the student loan is $1200.  Because the interest is tax deductible, at a marginal rate of 29.6%, then you are really getting back: $1200x 29.70%= $356 > $200.

So you will get $355 back from the government.  If you pay the car loan off slower than the student loan, then you are slowly letting the government keep more of your money.
Scenario 2: Let’s say you pay down your student loan slower,  only $800 a month, and you paid off your car faster.  If you have a yearly student loan interest of $1500, then $1500 x 29.70%= $446.  You’ll have $100 more back from the government, and you’ll pay less interest on your car because you are paying it off faster.  Win-win situation if you are in a higher tax bracket.

Both debts can be bad though, but one type (good debt) is less toxic to your personal finance than the other.  If you’re going to have debt (and yes, we all do), then it better be good debt… unless of course (as I mentioned about and want to mention it again), you don’t pay taxes OR you’re paying really low taxes, then in which case, all sorts of debt isn’t good.  Though the Canada Revenue Agency says you could defer claiming your student loan interest for the next five years.

Of course, debt is not good… PERIOD, but if we have to deal with it (which the majority of us do, unless we won the Lotto Max), then might as well figure out which one is somewhat advantageous.

Do you agree or disagree with my categorization of good debt and bad debt? Do you have any other ‘debts’ that you would like to add to this list?

Related posts:

1. Managing Debt the Effective Way
2. Analysing Your Debt and Cutting Down on Spending

I was checking this post by Studenomics that talked about why Twenty Somethings are not saving money and being of the same generation Y/ 20 something category, I got to thinking…

In the past, Canadians have traditionally saved about 10% of their gross income and stashed it away in their piggy banks. Currently, the savings rate is about 0% (or with a net negative percentage). In China, it’s 30%. For some reason, we are not saving money any more!

Really, why AREN’T we 20-somethings saving money? Why IS there a disparity between the savings of Generation X and Generation Y?

I personally have a few hypotheses myself.

Other than the ones mentioned by Studenomics, here are some reasons why I think we are so broke.

I think that one of the main reasons we (we being a generalized term) aren’t saving money is because we are so used to:

• Instant Gratification

Our parents are the baby boomers. They worked really hard to secure the financial security that they have now.  They worked hard to make sure we grew up well and had everything that we wanted or needed (or even not needed!), because when they grew up, they didn’t have anything.  I remember when I was a teenager, I would whine for that $80 pair of jeans to be just like the rest of the “cool crowd”. Our parents spoiled us, really.  What we want, we got.  So that brings us to now, where we still have the mindset of what we want, we get.  Even if that means charging that $300 pair of Rock and Republic Jeans to your card when you have $100 left in your bank account.  Or leasing that expensive sports car when you really can’t afford it.  We live in a society now where you have to flash your cash in material goods.  Or else people think you’re a nobody.

We grew up with television, we grew up with technology, we grew up with computers.   We grew up with images of celebrities and rock stars who have everything.  Louis Vuitton bags, iPhones, $250+ jeans, BMW’s, Mercedes… this is the norm everywhere I go- at least for Vancouver, anyway!  We are programmed to think that we need  and deserve these items to be happy.

The other reason I think we aren’t saving money is because of the use of:

• Credit Card/ Debit Cards

Like Studenomics said, we live in a society now in which we pay for everything by card.  It’s really easy to lose track of how much you’re spending.  I was checking out my credit card statement, and feeling quite proud of myself as I hadn’t had any big purchases on my credit card bill (YET- I haven’t gone Christmas shopping yet) but the bill still added up to $450 because I was purchasing $20 here and there.  Little things really do add up.

That isn’t to say that I would start paying for everything by cash… I love charging things on my credit card because I get points from it!  I guess the main thing to remember is to go over your statements, you have to be AWARE of what you are spending your hard earned money on.  Don’t get trapped into credit card debt- yet sadly we are! According to a recent statistic, the average 18-34 year old has $8200 in credit card debt.

Speaking of debt…

• Student Loans

Generation Y is  super-educated.  We have bachelor’s degrees, master’s degrees, doctorate degrees… MBA’s (phew, that degree can certainly knock a dent in your pocketbook).  We also have super-student loan debt too!  According to a recent statistic, the average student loan debt is $20,000.  We are pretty lucky here in Canada where we don’t have to pay $40,000 a year for school.  Back then, there wasn’t so much emphasis based on post-secondary education, you could succeed without a university degree or further education.  The story’s different now- I know some people graduating from University of British Columbia (kind of an Ivy League school in Canada) with a degree are SOL- some working in retail still because it’s so hard to find a job.  So we end up with high debts and a low paying job.  It sucks.

• Banks are to Blame!

Well, maybe.  (Haha, that’s another trait of Generation Y, we like to blame things on others, but that’s another story).  Back then, you had to have 25% down to buy a house.  Now it’s all different, there’s so many options to choose from.  Nowadays, the banks can lend you a mortgage for 5% down and do a 35 year mortgage even!  This means higher monthly payments and higher interest, and less money in your pocket in the long run, but I guess we don’t really realize it.

don't let this be you, generation Y!

What do you think?  Are there any other reasons out there that us 20 somethings aren’t saving any money other than the ones Studenomics and I mentioned?

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