Good Debt, Bad Debt

When we moved from Houston to Portland, we made a conscious decision to use the money from selling our house in order to buy outright once we found the right place. We did this for two reasons.

Firstly, we liked the idea of going into our FIRE mentality with absolutely no debt, we felt this would be a good way to keep disciplined in our financial planning and be “one less thing to worry about”. Secondly, to be honest we didn’t think as retired people any traditional financial institutions would give us a mortgage!

But was this the right thing to do? If you read the various money columns there is often conflicting advice. Everyone agrees that there is definitely bad debt or debt you don’t want to carry. A good example is credit card debt; only 35% of Americans pay off their card each month, and the average person has $4700 in credit card debt. Clearly this is the sort of debt, especially when it is at a 15% or more APR, that you want to pay off before you do anything else.

However a mortgage is often called “good debt”. This is the sort of debt that is OK to carry because it prevents a large portion of your net worth being stuck in one place. We have also found that having zero debt often gives you a lower credit rating than we should have because it’s “too good to be true”. Also, and more importantly, with mortgage rates at 3-4%, even a conservative investment in the long term should be able to return more than that and thus make you a profit over paying off the house.

That point of view is valid and certainly there have been times when we were carrying a mortgage that we could have paid off quicker but chose to invest. However the current market bull run has been going on for almost 10 years, there is definitely a possibility that markets may retreat over the next few years and 3-4% return may not be guaranteed. In which case paying off principal and guaranteeing yourself that 3-4% return may not be a bad approach.

There is no hard and fast answer and, as mentioned above, a lot of advice columns disagree over whether the concept of “good debt” even exists. So it may come simply down to personal choice.

At the end of the day though, psychologically, there is a great feeling to simply not owing anything to “the man” and being able to live debt free.

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steve@pursuingretirementPeter Wang Recent comment authors
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Peter Wang
Peter Wang

When the stock market corrects, and we get our once-in-a-decade buying opportunity again (as in 2002, 2009,… 2018? 2019?) it will be good to spend cash to buy stocks, and buy houses with debt.

Peter Wang
Peter Wang

Also, Dr. Wade Pfau, a retirement researcher, has written a book on the uses of reverse mortgages for add robustness to retirement withdrawal rates. His modeling contradicts the conventional wisdom, namely, that you should never do this and only as a last resort. You might look it up the book. There have been lots of changes to reverse mortgages since 2012, reforms to past problems. If you use them correctly, the amount your kids inherit increases. They don’t get the house, but your portfolio might grow large enough to more than compensate.


Good article. I know there is a lot of controversy over good and bad debt. It sure is easier to sleep at night when you are debt free.