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Many of you have made bad decisions about debt.

I’m not going to shame you or make you feel bad about that. But I do want to help you make better decisions going forward.

Now, a lot of personal finance types will tell you that debt is inherently evil. They have no use for it under any circumstances.

These messages often have religious overtones. In Islam, for example, Shariah law basically bans charging or paying interest. It says you can’t finance anything with debt.

A lot of Christian-themed personal finance pundits say debt is evil, too.

Even the “experts” who don’t put a religious stamp on it talk about debt in terms of a sliding scale. You know—a mortgage is good debt, a car loan is less good debt, and credit card debt is bad debt.

Let’s clear something up here: Debt is not evil.

A lot of great things are built with debt. Go to any big city and walk downtown—all of those tall buildings were built with debt. They were not financed with equity.

Certain types of debt aren’t inherently good or bad, either. An $800,000 mortgage on the dream house you can’t afford is not good debt. (You know what I think about mortgages.) And charging $100 worth of tools you need for work is not necessarily bad debt.

The Debt/Growth Test

The real test for whether debt is good or bad… are you growing faster than the debt?

Say you’re planning to buy a new car, and the dealership offers you a loan at 6% interest. Ask yourself: Is my income growing faster than 6%?

If the answer is yes—because you’re steadily moving up in a company, taking on more clients, growing your side business, etc.—then it’s okay to take on that loan. Because you are growing faster than your debt.

Now imagine that same car loan, but this time your income isn’t growing much at all. Maybe you haven’t had a raise in three years, or your boss keeps cutting your hours, or there’s been widespread layoffs in your industry and your job is at risk. In that case, you are not growing faster than your debt, and you need to say no.

So you buy a cheaper car, the one you can pay cash for. Or you keep driving that ’06 Nissan Sentra for another year and work on boosting your income. Either way, you have to turn down that 6% loan because it’s bad debt.

Here’s another example: Imagine you’ve been out of work for six months and you’ve run through your savings. After a lot of networking and rounds of interviews, you’re offered a great position. But you need to spend $200 on gear, a uniform, dress shoes, or whatever before you start, and you’re totally broke.

Is it okay to charge that stuff to a credit card and pay the 18% interest? If that’s the cheapest way to get the stuff you absolutely need to start that job then yes, charge it.

Of course you should pay it off with your first paycheck. But going from no job and no income to a steady paycheck means you’re growing faster than $200 in credit card debt at 18% interest.

No One Else Will Say This

The debt/growth rule is why I’m not reflexively opposed to things like payday or title loans. Sure, these loans can have very high interest rates of 100%, 200%, even 300%. And they usually involve miserable stories. People get desperate and borrow money they have no chance of repaying on time. The interest racks up, but their income stays the same, and they never catch up.

Those stories rarely end well.

But there are instances where people need access to credit, and they are actually growing faster than the interest rate on the debt. Again, maybe they just got a new job, so they know they’re going to outgrow the debt despite the ridiculously high interest rate.

You’re the Judge

Debt isn’t always bad, but you have to be honest and realistic before you take it on. Ask yourself…

• Am I really growing faster than my debt? If so, by how much?

• Is that a fluke, or can I reasonably expect that growth to continue?

• Is it possible or even likely that something will interrupt that growth?

These are the questions you need to ask yourself before taking on debt. Not, “Will debt put my soul in peril?” That’s a topic for another day.

Jared Dillian