We are frequently reminded about household debt in the news and I feel that we are given the impression that debt is to be avoided.
Actually, debt can be a very positive thing. It represents an opportunity to gain leverage in any investment portfolio. However, we can’t afford to be reckless with the debt that we assume. We certainly need to evaluate risk versus reward and rub that up against our personal risk profile.
There is another side to the debt conversation that I feel needs more attention and that is the cost of debt. Some debt is what we might call reasonably priced. An example of this is a mortgage in today’s environment. Mortgage rates are at near all-time lows. On the flip side, we have credit card debt which can and does exceed 20%. A word that describes this cost of debt is ‘egregious’.
Debt is incurred as a result of the choices we make as individuals. The use of high cost debt might simply be to satisfy a personal ‘want’ as opposed to a more pressing ‘need’. We would be well advised to keep the cost of our debt and the impact that it has on our household budget as we consider our ‘wants’.
Is debt bad? Absolutely not. Should we pay attention to the cost of our debt? Absolutely!