Good Debt VS Bad Dept. Part ll: The Fallicy of 162

24 October 2012

The first part of our Blog pointed out the key difference between Good Debt and Bad. Good debt is that which produces an income or is used to purchase an asset that will appreciate over time. For example: borrowing money to invest in stocks, a business, and real estate. On the other hand, Bad debt happens when you purchase a consumable with no after purchase value. Examples would be unpaid debts for holidays, eating out, clothes, and even cars. As we stated in Part I, The Federal Government wants to get the Consumer Debt Ratio to Disposable Income ratio down from a record level of 162%! We say the ratio needs to reflect bad debt only, a new ratio needs to be developed. To prove our point, let’s consider two individuals, both with disposable income of $80,000 per year. Individual A has $30,000 of credit card debt and rents a condo at $1500 per month. Individual A has a score of just 37% - just the type of person Messrs. Flaherty and Carney and the Feds want in order to get the 162% number down. Individual B also has a disposable income of $80,000. He bought a condo with 5% down and has a $300,000 mortgage. Individual B’s monthly mortgage payment is $1449 of which $800 goes to the repayment of principal or a forced saving. The problem with Individual B is that his ratio is 375% - not less than 162%!! But this is just the type of person that the Federal Government does not want! Who would you rather be?? And what conclusions can we draw? Besides stupid, we guess the Government wants a nation of renters. Keep the people poor and dependent.