You may have heard strong warnings to steer clear of debt. And it’s true—debt can majorly harm your financial future. But is debt ever worth it? Can some debts help more than harm? We’ll answer your debt questions in this post.
Is debt ever worth it?
Let’s look into what kind of debt can be profitable and the types you should avoid.
What kind of debt can be profitable or worth it?
“Good” debt allows you to do something that either generates more income than what the debt costs, or saves money compared to other available options.
For example, owning a house with a low-interest mortgage allows you to participate in any housing price increases, builds up equity, and may even be less expensive per month than renting a similar house.
Another example is purchasing a car with a loan. If you need a car in order to work, using debt to purchase a reliable one could be a good use of debt.
Lastly is the example of education loans. If the degree will land you in a field with a high pay rate, taking out loans to pay for the education can be a good investment.
With all of the above, however, be careful not to spend more than you need to just because taking on debt allows you to do so. For example, a $15K reliable car that is a few years old should get you to work and back with no problems. Even if you can get approved for an $80K loan, you don’t need that new Audi.
What kind of debt should you avoid?
While some debt is helpful, it’s nearly always best to avoid consumer debt. This is debt that will never pay for itself or improve your financial position in the long run.
For example, credit card debt, payday loans, loans on luxury goods, and other similar debts are unnecessary. In these categories, the best principal is to only buy what you can afford to pay for up front.
Acquiring debt for purchases that you don’t need will simply cause you to lose money over time. With every month that goes by, you’re paying extra for interest. By simply saying “no” to consumer debt, you get to keep your hard-earned cash instead of giving it over to extra interest on your purchases.
Tips to avoid consumer debt
Of course, “just for fun” purchases aren’t always bad – if you have the cash.
Each time you want to make a purchase, ask yourself if the item is something you really need. Remember, just because others around you are buying it doesn’t mean that you need it! Can you get by without it?
Here’s the hard truth: If you can’t pay cash for it, you can’t afford it.
How do you decide where your money should go?
The great news is that you are the one who gets to decide where your money should go.
If there’s something you want, budget for it. The key here is thoughtfully allocating your dollars rather than making spur of the moment spending decisions simply because you really, really want it.
A budget makes your money work for you. It allows you to decide where that hard-earned cash is going. If you don’t already have a budget, read this post to find out how to start budgeting today.
A better financial future starts today
At Milestone Wealth Management, we want you to feel confident in your financial future. You don’t have to spend your nights stressing over financial uncertainties. Instead, you need a plan, and we’re here to help.
Contact us today, and let’s create a plan that will set you up for success.