Is There Such a Thing As Good Debt?

Debt, borrowing and investments are essential parts of the modern financial system. Good and prudent debt features prominently in both households' finances and business; in fact, many forms of debt help grow the economy and personal wealth. Ask yourself when borrowing if the debt you will incur is manageable and necessary.

Borrowing and Investment in Macroeconomics

Debt is an important part of macroeconomics. In macroeconomics, savings is the inverse of investment because banks lend most money electronically listed in savings accounts. For every lender there is a debtor, and investments grow the economy by providing money to those who have innovative ideas. For example, startups incur debts while establishing their businesses, but most use the money to create profitable enterprises. Startup capital is good debt because the initial debt generates later profit for both lender and borrower.

Keynes and National Debt

John Maynard Keynes proposed that governments should combat business cycles by spending when economies are low in order to moderate declines by employing people directly and buying more goods and services. Paul Krugman won the 2008 Nobel Prize in Economics for updating Keynes' theories (among other things) and often used his column in the New York Times to argue that increased government spending and national debt following the 2008 financial crisis was not only good, but necessary.

Household Debt

Incurring debt to buy large consumer items -- a car, a house or even a refrigerator -- is efficient, as long as the consumer can pay off the debt. For example, many people will make enough money to eventually buy a house, but borrowing money and slowly paying the loan off makes more financial sense than renting while trying to save up hundreds of thousands of dollars.

Consumer Debt

Debt becomes unmanageable when a person uses credit cards as extra income. While economic theory can easily label investments and borrowing for capital improvements as good debt, consumer debt is more subjective. Borrowing to buy a car that will reduce commutes and increase time with your family can be a sound financial decision or a luxury that hurts your savings. However, putting unnecessary consumable items such as clothes, toys and restaurant bills on a credit card is almost never good for the consumer.