“Rather go to bed supperless, than rise in debt.”
Ben Franklin was one of the greatest minds of his time and shared his wisdom on a great many topics. But when it comes to the subject of borrowing, his anti-debt absolutes don’t serve as a great guide for our more complicated financial world. Unlike in Ben’s time, almost no one goes to debtors’ prison anymore, and in some cases going deep into debt can be a very, very good thing.
Case in point. Apple is one of the richest companies in the world, currently sitting on a $145 billion pile of cash. That’s $145 BILLION. IN CASH. Yet the company recently went to Wall Street and borrowed $17 billion through a bond issue. And the move is being applauded by investors, sending Apple’s stock price soaring.
What’s at play here? Simply the concept that Benjamin Franklin didn’t talk about, which is “Good Debt vs. Bad Debt.” The brilliant (let’s say Genius) folks at Apple wanted to pay cash to their investors but that would have meant bringing some of their cash from overseas and taking a big tax hit. Instead they were able to borrow money at rates close to zero and (wait for it) take a tax deduction. Goal achieved + money saved = Good Debt.
So clearly we see that borrowing money isn’t just for the broke, irresponsible or dumb. Apple is none of those things.
There are lots of examples from personal life as well. Borrowing sensibly to get a college education is Good Debt because of how much more a college graduate can earn. Borrowing sensibly to buy a home can provide tax advantages and an opportunity to build equity. Borrowing money to buy a car can open up access to jobs off the path of public transportation.
And a major Good Debt play is to borrow money to reduce the cost of existing Bad Debt. Every day there are consumers who refinance high-interest credit card and loans debt to reduce their monthly payments and pay less interest over time. This should not be seen as borrowing more, but borrowing better. Since the financial crash, banks have been a lot less willing to lend money to people deeply in debt, even though the government bailed them out and provide them access to capital at historically low rates. Fortunately there are alternatives like Lending Club and credit unions to fill the need.
The only caveat to all of this is that any debt program that you can’t see a way of paying off in the future is Bad Debt. If there is no realistic plan to fulfill a debt obligation, entering into it is not only illogical, but immoral as well. And Ben had a lot to say on that subject.