The general idea is that debt of any kind is bad no matter how small, but we beg to differ. While debt may be good and bad, the right kind will help you increase your wealth. Some debts are better than others such as student loans and mortgages but only if you know how to manage that debt.
A lot of people must be confused after reading this and that’s because most of the time we only talk about getting rid of debt. So, if you can’t get rid of it, then why not use it for financial gain? According to financial experts, taking on certain debts will lead to beneficial outcomes. So, let’s see how debt can help you in the long run.
1. Good debt will increase the value of an asset:
There are two kinds of debts: good and bad. The difference between the two is that good debt helps you build your net worth and eventually adds value to an asset. Good debt can help you generate income and avail lucrative financial opportunities.
Many middle to low-income families take out student loans and mortgages to pay for college and buy a home. This type of debt is essential if you wish to make a career and get a job.
However, experts say that your total student debt shouldn’t exceed what you expect to earn in the first year of your job. By taking out a loan for pursuing a degree that will lead to a high-paying job such as an llm in taxation or an EECS degree, you are indirectly increasing your wealth and adding value to assets.
Typically, student loans have lower interest rates compared to other types of debt and that is why you can pay it off easily with a high-earning job.
2. It can help grow your business and credibility:
Debt is not always “unforgiving” especially when it comes to debt related to business. In the world economy, debt plays an integral part in driving the entire system because almost all major corporations are under some form of debt. When you look at it from the outside, debt or a loan for business is an effective way for earning a return on investment among other things. As long as you can manage the debt and make payments on time, it will keep adding value to your business and help it grow.
Many startups and small businesses lack funding which isn’t surprising, and the majority of small business owners tend to take out loans as capital amounts to kickstart the business. Experts say that taking on debt for business can be the best investment only if you know how to use it for profit.
Also, taking on good debt can help build a relationship with lenders. Moreover, if you pay on time, it can make you seem credible enough to take out bigger loans at any time you want.
3. It can help you achieve your financial goals:
You can consider good debt particularly low-interest debt as an investment in your future. If it helps you fulfill your financial goals and increase opportunities for more earning, then it’s a debt well taken.
Debt such as mortgages or car loans are big decisions, but they are also the type of debt that will one day make you a home/car owner. These types of loans make sense because they are generally aimed at investing in yourself or using that leverage to buy other valuable assets.
Take mortgage, for instance, most home buyers do not pay the entire amount upfront in cash because most middle-income families don’t have that kind of money. So, they take out a loan to own property with a good credit score and become homeowners at a low-interest rate.
Since homes are appreciable assets and the real estate market is always alive, these people will become homeowners over a few years if they pay on time. The same goes for car debt as taking out a loan according to your means to buy a car for availing better financial opportunities means that the debt is good and adding value.
However, in either case, you should refrain from taking out a loan for buying homes and cars that you cannot afford.
4. Steer clear of personal and credit card debt:
Now let’s talk a little about debt that doesn’t generate any sort of value with time. It’s easy to recognize bad debt because you lose value of that asset the moment you take ownership. Most of our everyday consumables such as food, automobiles, and clothes can be described as bad debt but what really takes a toll on your finances is credit card debt, payday loans, personal loans, and so on.
Nothing good usually comes out of credit debt because mostly the items you buy with it depreciate over time. Moreover, the interest on a credit card is high as well and if you have a bad credit profile, then it can affect your future chances of taking out a good loan.
Remember credit cards and personal loans are only good as long as you keep them under control.
You may consider debt as the death of all good things but if you can’t achieve your financial goals without it, then you should turn it into good debt. Mortgage, car loans, and student loans are considered good debt as they offer opportunities to grow your wealth.
However, the real trick is to manage your debt so that it doesn’t get out of hand. Ensure that you don’t take out more than you need and avail good earning opportunities with your debt.