There are two types of debt. Good debt and bad debt. Put simply good debt is borrowing money to purchase an investment which will go up in value. Bad debt is using money you don't have to buy shit you don't need to impress people you don't like.
Let me elaborate.
Good Debt
As I said before good debt is when you borrow money to purchase in investment that will go up in value and generate income. Another good thing about good debt, is because it was used to purchase an investment the banks have security, thus they're inclined to offer a lower interest rate because they know they'll get their money back (one way or another). Another bonus is that in some circumstances you can actually get a tax deduction for the interest you pay on a loan to purchase investments.
I would like to stipulate that good debt is even better when the debt-equity ratio is within your risk profile and you can manage repayments. Good debt goes bad when you borrow too much money and cannot afford repayments or when the value of your investment drops below the value of the loan. If you want any more evidence of this notion just take a look at the sub-prime issues in the US.
Bad Debt
Bad debt is personal loans, car loans, credit cards, those "interest free" finance contracts and any other form of interest incurring finance. Bad debt is bad because the asset that you purchased with borrowed money loses its value the second it leaves the shop, but your still stuck with the debt. Because the banks have no security over the debt, they're inclined to charge you a punitive interest rate to cover the risk of you defaulting. You'll notice that the higher the risk of default the higher the rate of interest; a car loan will attract a lower rate than a credit card, because the bank can always take the car and get some of their money back.
So we want to eliminate our bad debts because they have no productive asset behind them and because we're paying a higher rate of interest on the debt. You'll notice that if you're paying 20% interest on credit card debt, there's very little point in saving money in a savings account that collects 6% (or worse trying to play the stock market). Keep it simple stupid; if faced with the decision of saving at 6% or paying off debt at 20% you always choose the debt. Why? Because the paying of the debt is like getting a 20% return on you're investment! Why wouldn't you choose it?
So before you shut up and save, perhaps you should shut up and pay off your debts. Then once your free from debt stop buying useless crap and start saving for your future.
Chris Hooper
(Shut Up and Save)