It’s March! We’re officially through the worst month of the year. Congratulations world. I always appreciate when I can put February in the rearview mirror.
March marks the unofficial beginning of Canadian personal tax season. Six years ago(!!), I put together a list of things you should prepare to have your personal tax return completed. The list is largely still correct today, with the addition of needing to provide documentation related to any real estate purchase or sale you’ve made during the year. If you’re looking for a relatively exhaustive list of the documentation you may need to prepare, see this link here.
I’m going to continue some financial writing momentum from last week. I had a few emails flow in from readers who sent some creative encouragement my way. To them, I say, “Thank you greatly!”. I’ll respond better in the coming week, but it does not go unappreciated to have readers reach out with words of encouragement. Hopefully, this week is just a little smoother as a result.
I mentioned Toonie, a newsletter I wrote for a few months a few years back, and it’s become a nice spot to rob and repurpose some financial topics. I may repurpose some of those topics over the coming weeks — the severity of tax season scheduling puts me on my heels sometimes, so I apologize if you’ve heard these stories before.
This week’s topic: My thoughts on the phrase “good debt” and “bad debt”.
Good Debt and Bad Debt
I constantly hear the phrase, “Well, at least a mortgage is good debt.” As in, buying real estate is an indicator of good debt, while purchasing anything else with debt is bad debt. I don’t agree entirely with this sentiment, especially since it’s such a common perception to have.
In theory, the only good debt is tax-deductible debt. Which means the debt needs to be tied to the purchase of an investment that earns you income in some shape or form. The interest you pay on the liability becomes deductible for tax if it currently or will likely result in interest, rent, royalties, business, or other forms of income to be paid to you now or in the future.
In a broader sense, though, good debt (in my opinion) is any debt that purchases an asset that yields a greater rate of return than the cost of that asset (including debt/interest costs). It doesn’t have to be just tax-deductible debt.
So, if you take your home equity line of credit (HELOC) (which carries a low interest rate like, say, 4.99%) and improve your home (which carries an average annual rate of return of 7.31%), then the home equity line of credit is good debt. The interest paid on the HELOC isn’t deductible for tax purposes if you improve your principal residence, but it still results in a greater long-term asset improvement than if the investment wasn’t incurred.
If you purchase a vehicle on debt, and that vehicle has a rate of return greater than the amounts paid out to operate the vehicle (including interest paid on the loan), then I think that debt is still “good”. It doesn’t matter how fast a vehicle depreciates. This could be the case if you use the vehicle to earn income, for instance.
There’s also the residual value of any asset you purchase with that debt, or the value of the asset once you’re done using it. In effect, if you borrow $5,000 to purchase an asset, and you can sell it for $2,000 once you’re finished with it, you only have to earn $3,000 (plus interest costs, which are very low these days) to ensure the debt is “good debt”.
Basically, if debt enables you to buy something that improves your net worth eventually, it probably meets my personal definition of “good debt”.
Let’s not kid ourselves: I do believe consumer debt is bad debt. "Consumer debt", something we'll touch on more in the future, could be considered "expenses", or the costs of running your everyday life. Paying interest on groceries or for the latest shopping spree is seldom wise (the only situation that comes to mind is if you happen to own a clothing store). "Expenses" should be paid for in cash or on a credit card and paid off in entirety each month.
There are also common scenarios which I’ve come to feel are bad debt when most people consider it good debt. A personal residence with lots of equity and a tiny mortgage is bad debt — the owner has lots of personal net worth thanks to the low mortgage, but there is a giant asset sitting there, idle, unable to build anything. You shouldn’t always have a mortgage, don’t get me wrong. But paying down your mortgage extra-fast and not reinvesting the unlocked equity generally results in less personal net worth growth in the long run.
Lastly, I believe there is “good debt”, “better debt”, and “even better debt”. Call it Debt Pro, Debt Max, and Debt Ultra (we’re on the eve of a major Apple product launch week, after all). And I'd attribute those characteristics solely based on the rate of return of the asset you purchase. Essentially, the more you earn with the asset you purchase with the debt, the better the debt. An example of each:
- Debt Pro — Purchasing a tool that enables you to casually earn income in the evenings over a few years.
- Debt Max — Purchasing a rental property using equity you own in your personal home.
- Debt Ultra — Hiring an employee, effectively billing out their time, and using the unlocked time you gain to reach new business success levels.
(These are examples I am coming up with on the spot. They won’t be perfect analogies. I’m attempting to move up the compounding and impact scale for each “type” of debt.)
Remember: Debt is a tool. It costs something, yes, but it provides access to assets faster than if you were to save to pay for them with cash.
If you can earn more than all the costs associated with the asset purchased with debt, then I think it’s good debt.
Debt makes the world go round.
The Second Cup
Scrybble
Scrybble is a monthly subscription to sync your reMarkable notes to Obsidian. It can find and extract highlights (remembering, of course, that highlights on a reMarkable are not actual annotations, which causes all sorts of hardship if you want to sync your highlights somewhere). You can also convert your reMarkable typed notes to Markdown. I still have to figure out how to move the Markdown highlights from ePubs I’ve read on the reMarkable into Readwise, but this at least seems promising.
Vernal Core3 L-Shaped Standing Desk
I discovered Vernal through a Workspaces.xyz interview in the last few weeks. This appears to be a totally price-accessible L-shaped standing desk option (which, I think, is basically a unicorn in the desk world). I’d be curious whether the Core3 is ultra-wobbly or relatively stable.
What is Trust?
Though Aly has directed his writing towards physicians, I’m finding it interesting how many nuggets can be transferred to other professions. I appreciate this close look at trust, and the subsequent brainstorming session on applying it to accountancy.
GMK MTNU Dasher Keycaps
I’m not into any Apple TV+ shows, but my understanding is this particular set of keycaps takes inspiration from an Apple TV+ show. These look excellent. Though, I’m unsure what kind of office decor would benefit from boldly blue keycaps.
Retro Future: The Mid-Century Modern Office Setup
Here’s another discovery I made thanks to Workspaces.xyz. There’s a lot to discover and enjoy on Spencer Scott Pugh’s blog.
Quote of the Week
“Civilization advances by extending the number of operations we can perform without thinking about them.”
— Alfred North Whitehead
A simple quote, but when thought of in depth, is impactful in so many ways. When was the last time you thought about what it takes to produce a hot shower?
Happy Sunday. I hope you have a wonderful week ahead.
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