One Big Thing That Most People Don't Understand About Debt

People tend to have a complicated relationship with debt, and debt is often misunderstood. Some people think "all debt is bad," and try to avoid getting into debt at all. Others feel guilty about being in debt, like debt is a moral failure; like they're a bad person because they borrowed some money.

Other people hate being in debt so much that they bend over backwards to pay off all their debt as fast as possible, even lower-interest debt like car loans and mortgages. They sacrifice a lot of time and joy because they're obsessed with "getting out of debt."

One thing I've learned over the years from working in personal finance and banking is: there is never one right answer for every situation. People handle money in complex ways for powerful emotional reasons. If having zero debt helps you sleep at night and feel better about your money, then that's great.

But I believe too many people are making themselves miserable because of a misguided understanding of what "debt" really is.

What is debt and how is it used?

Debt is a tool that lets you buy time. Debt is not just about the value of money, it's about the value of time. Debt is a form of financial time travel that lets you make your life better today in exchange for money tomorrow.

And of course, it can be bad for your finances to take on high-interest debt that you can't afford to repay. Try to avoid credit card debt. Sometimes when people can't pay their bills, declaring bankruptcy is the best way to get out of financial trouble.

But on many occasions, debt is actually a good deal. Here are a few ways that "buying time" with debt can actually improve your personal finances -- present and future.

Debt lets you buy what you want (or need) right now

Let's say that you want to buy a car. Instead of having to come up with $30,000-$40,000 of cash to buy a car today, you can borrow money to "buy time" to pay off that car with an auto loan. You can "buy time" to pay for your house over the course of a 30-year mortgage, instead of having to live in a lower-cost, lower-quality home.

Debt lets you improve your life today in exchange for future payments. Yes, you'll owe interest. But many times, it's OK to borrow as long as you can make your payments and as long as the borrowing leaves you better off in the long run.

Debt lets "future you" pay your bills

If you take on debt, you are borrowing money from your future self. But here's the thing: that's often totally fine! Many times, "future you" is going to be happy with the deal. As people get older and advance in their careers, they tend to earn more money. They may get pay raises and promotions at work. Your car payment might be a lot more affordable in three years. Your mortgage payment might feel much more manageable in five years.

Debt is a bet on the future. By borrowing money, you are making a statement of faith that your future self will make more money and be better able to cover your monthly bills. And that can make it OK to borrow today for the car, home, or other life expenses that you need. You're (probably) going to get paid more money in the future. Your future could be brighter than you realize!

Debt gives you options for your cash

I currently have a car loan that I could comfortably afford to pay off with cash. But I'm not going to pay off that debt. That car loan only has an interest rate of about 3.75% APR. My cash can earn more money than that in a high-yield savings account.

I would rather have a $20,000 car loan and $20,000 of savings in the bank, than have a paid-off car loan and $0 in the bank. Even if my bank savings account wasn't paying higher interest than the car loan APR, I would still make this choice. Why? Because I value having flexibility and options for how to use my cash.

What if my family got hit with a big emergency expense, what if I decided to take a fun vacation, or what if I needed to put some cash into tax-advantaged retirement savings like an IRA instead? I can't make any of those moves if I have $0 in the bank but a fully paid-off car. When your car is paid off, you can't pull cash out of it like an ATM. You can't "spend" your car. Having cash in the bank is hugely valuable, even if you're losing a few dollars a month on loan interest.

Debt can get cheaper

Along with debt getting "cheaper" in the future as your income (likely) goes up, debt can be refinanced in case interest rates go down. The mortgage payment you have today won't necessarily be this expensive for the rest of your life. And ideally your mortgage or auto loan debt is at a fixed interest rate -- you don't need to worry about your monthly payments going up.

Bottom line

Debt is a financial tool, not a moral failing. Yes, some people get into trouble with too much credit card debt. But if you can manage your monthly payments, debt can give you options, flexibility, and a more comfortable life.