Can getting into debt really be considered a good thing? General wisdom says no. Being tied to a money lender, be that a bank or an independent source, can be a financial burden best avoided. However, not all debt is a bad thing. If there are valid reasons for getting into debt, provided you will have the means to pay it back at some point, then it can be classified as ‘good debt.’
Let’s look at this a little closer.
What do we mean by good debt?
When considering bank or private money loans, there needs to be a sensible reason for wanting the money in the first place. If it’s an investment for your financial future, and you have a plan in place for clearing the debt as soon as possible, then a loan can be considered.
Examples of why it’s okay to get into debt include:
To pay for an education – Interest rates are relatively low on student loans, and you often don’t have to pay back the money owed until you have found a job after graduation. Considering an education can lead you into a higher paid career, you should have little problem making those repayments later on.
Investing in a business – Rather than ‘working for the man,’ many people are choosing to start out on their own, setting themselves up in business to secure their financial future. With the various expenses needed to get the ball rolling, a loan is often used to kickstart the business into gear. Provided there is a clear and realistic plan at the outset, paying back the loan shouldn’t be an issue once profits start coming in.
Taking out a mortgage – Buying a house is a valuable asset, whether you choose to live in it yourself or use the property as an investment opportunity. You can add value to your home to make a profit should you sell it down the line, and if you do decide to rent it out to others, you may make back more than enough money to cover the mortgage.
So what can be considered bad debt?
We have looked at some of the reasons why debt can be considered a ‘good thing,’ so let’s look at the flipside. Bad debts include:
Paying for luxury items – From high-end televisions to expensive vacations, don’t take out a loan on something you don’t need in your life unless you are sure you have the means to make the repayments. Your better option is to save your money for life’s luxuries instead.
Paying off bills – If you can’t pay your bills on time, you are only going to get overwhelmed by debt if you take out a loan to help you manage these expenses. Instead, seek advice from a debt charity, as they will help you get back on track with your finances.
Something to think about
Getting into debt is a good thing if a) you have the means to make repayments, and b) you are investing in something that will impact your finances positively down the line. Getting into debt is a bad thing if a) you can’t make repayments, and b) you are going to use the money on things that won’t pay for themselves in your future.
There is a difference, so careful thought is needed. And even when considering a loan for those things that fall under the category of good debt, you still need to take due care by shopping around for cheaper rates of interest to strengthen your financial position further.
And so, if you have been thinking about taking out a loan recently, consider our advice before signing on any dotted line. You can improve your financial future by getting into debt, but the reverse is true without careful planning and clear incentives at the outset.