One of the basic tenets of personal finance is that it’s vital that you pay off your debt. In general, debt is viewed negatively. However, there might be times when debt can be a good thing — or at least a Not So Bad thing.
If you’re going to use debt to further your finances, it’s important that you understand the difference between debt that can have reasonably positive outcomes, and debt that is mostly detrimental.
Will the Purchase Advance Your Finances in Some Way?
Your first step is to determine whether or not a purchase made with debt is likely to advance your finances in some way. Properly considered student loans can provide you with the education and skill you need to get a better job. If you get the right car loan, your vehicle can provide you the means to get to and from work when you live in an area (like I do) with inadequate public transportation. A loan for real estate can result in the purchase of a primary residence or in the purchase of investment property. A good business loan can put you on the path to financial independence.
It’s possible to use your debt as a leveraged way to further your finances with the purchase of assets. The right assets can make a big difference in the long run. Plus, an asset — whether it’s a good education or 12-unit apartment building — has the potential provide you with a return that exceeds the interest you pay. Even a car can provide that, if it enables you to do what you need to do.
Other purchases are merely drains on your pocketbook. This is especially true of consumer items that you buy with high interest debt, using credit cards. That big screen TV, bought with a credit card at 15.99 percent APR, isn’t going to advance your finances. It might make you feel good about what you own, and provide you with entertainment, but it’s not going to boost your finances.
You should also be careful of the “good” debt you incur. I had student loans during my undergrad years, but I didn’t need them. I had a scholarship and a part-time job. So, even though someone might have said I was getting a degree, and that was a good thing, the reality is that I ended up with debt that was completely unnecessary. Paying for an expensive car, or buying a home you can barely afford, just so that you can have the status that comes along with it, can end up turning your “good” debt into a terrible financial burden.
Low Interest and Tax Benefits
Another consideration is the kind of benefit you receive from the loan. A low interest loan can be beneficial. It allows you to access what can help you boost your finances down the road, but isn’t overly expensive. If the rate is low enough, there is no need to pay the loan back early, since you can put that money in an investment account and possibly make even more.
Some types of debt also come with tax benefits. You can usually (double-check with a tax professional) deduct the interest you pay on a home loan, student loan, or business loan. While this doesn’t negate the interest costs completely, when you combine this benefit with what you can make from investments, the loan might be worth it.
Only you know what works for your finances. However, in some cases, a little debt isn’t always a bad idea.