“Good Debt” vs. “Bad Debt”


You probably have a smartphone.  And a big screen TV.  You probably subscribe to at least a couple streaming services and enjoy your double skinny mocha frappe latte cappuccino with oat milk and sprinkles (sorry, I just made that up).  As Americans, we are the richest people in the world, but in 2020, according to Forbes, we carried $ 14.3 trillion in debt including $ 438 billion in credit card debt.  The website debt.org published a study at the end of 2020 that 57% of Americans don’t have enough in savings or checking to cover a $ 500.00 expense.  That’s a medical bill for your child or the washing machine going out or the insurance deductible from storm damage that came out of the blue.

A lot of us are living on the edge.  CNBC reported in May of this year that a full 63% of Americans are living paycheck to paycheck.  If that doesn’t take your breath away, we all need to do a reality check.  To really experience financial freedom, we need to get a handle on debt in our families and put enough away in an “emergency fund” that we can tap when life happens and inevitable expenses pop up rather than pulling out the plastic and digging a deeper hole for ourselves.  First, let’s take a good, hard look at debt.

Good Debt

There are two kinds of debt: “good debt” and “bad debt”.  Good debt is the type you take on when you are investing in something that will gain value or pay off over time.  Your mortgage is good debt.  You buy a house, maintain it well, it provides shelter for you and your family and, historically, that home will be worth more some day in the future than it was when you bought it.

Another kind of good debt is educational debt.  You invest in yourself or another family member so they can gain knowledge and, hopefully, increase their prospects of earning more money over their lifetimes than they would have without that education.  Let’s be clear: it’s always better to have no debt whatsoever, but if you have good debt that will, over time, improve the financial lot of you and members of your family, I’m on board.

Bad Debt

Then there’s “bad debt”.  The huge truck payment with all the bells and whistles that starts depreciating the second you drive it off the lot.  That Visa bill that has this year’s vacation on it…and last year’s vacation and the really awesome bag you saw in your feed and just had to have.  Please, please, please, don’t misunderstand.  I’m not into “shaming”, I love me some shoes and people absolutely need transportation to lead their lives.  You get my meaning, though.  I’ve been a financial planner for many years and the folks with the bad debt issues know who they are and secretly feel guilty about the whole thing and spend a lot of time wishing like heck that someone would throw them a life preserver.  I’m your “lifeguard”.

If all you have is “good debt”, you have my permission to feel smug and quit reading in just a second.  A word to the wise, though: do your best to live a bit beneath your means and funnel as much extra money as you can scrape up to pay your house and your cars off early while you’re in your prime working years.  You’ll be a lot happier if you can enter retirement debt-free and really throw yourself into enjoying your “golden years”.  If you’re like most people and have that “bad debt” skeleton in your closet, please read on.

I’ll admit it: the first step to getting out of debt is truly “cringe-worthy” and time consuming and you’re going to curse me for it.  For one whole month, I want you or you and your partner to keep a record of every dime you spend.  I mean it: every soda, every Mickey D’s run, every tip you give the barista at your favorite coffee shop.  Not on your phone, not on an app; on paper with a pen.  Did you know Time Magazine reported that studies have shown that writing your goals down makes you 42% more likely to achieve them?  That was detailed last year.

Anyway, in writing.  At the end of the month, write down basic expense categories like housing, food, utilities, gas, entertainment, personal care, etc.  Own it; make it your own.  Your family expense categories won’t look like my family’s and that’s ok.  Now go to the calculator app on your phone and start adding up the items that belong in the different categories.  Make sure you’re sitting down when you hit “Total” as your calculations are going to blow your mind.

You will hate every second of this exercise, but don’t make the mistake of skipping it.  You can’t achieve meaningful change and right the ship if you don’t know where the leak is (and I promise this project is going to shine a light on some glaring holes of which you weren’t even aware).  Still with me?  Homework time.  Meet me back here next month for the common-sense hacks that will help you trim that “bad debt” and set you on a firmer path towards true financial peace of mind.

More questions about debt, saving or investing?  I’d love to hear from you!  Please call me at 563-949-4705 or email me at heidi@hhcinvestments.net.  You can also hop on over to my blog to read about other personal finance topics.


Heidi Huiskamp Collins is a licensed financial planner serving the Quad-Cities.  She has her B.A. in Business Administration with a minor in Economics from Augustana College and a master’s degree from the Graduate School of Banking at the University of Wisconsin/Madison.  When Heidi’s not serving her clients, she’s reading the Wall Street Journal cover-to-cover and volunteering in her community to lift up “at-risk” families, advocating for good mental health and promoting premier educational opportunities for all children.

Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC.  Advisory services offered through J.W. Cole Advisors, Inc (JWCA).  Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.