When Is Debt OK? 4 Times It’s OK to Take on Debt

 

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The worst four-letter word in finance, especially since, let’s say, 2008 is “debt.”

Personal debt.

National debt.

Sovereign debt.

They all have nasty connotations.

But, is debt always bad, without exception?

I think there are a few wise ways to use debt as a tool, not as a weapon of mass self-destruction. Here are four reasons not to be afraid of debt.

Use Debt for Things That Increase in Value

One use for debt is to purchase major items that have a better chance to go up in value. For instance, technically a home will go up in value, so taking a mortgage out for a house is a good idea.

Now, a car probably isn’t a good idea for debt. The second you drive the car off the lot, you’re losing money. But, an $18,000 or so price tag is a pretty stiff bill to pay in one chunk. Here’s a compromise: take out a loan on your car, but double the payments, pay if off a few years early and then keep saving that amount for your next automobile purchase.

Use Debt in Emergencies

You should save for an emergency fund, but sometimes the emergency hits quicker than you thought, or hits harder than you thought. If that happens, debt is certainly an alternative. But remember, when you reach safer shores, those debt bills are the first ones to pay off.

Use Debt for Your Credit Record

Acquiring and dealing with debt responsibly is actually a positive. It improves your credit score and probably will give you better interest rate when you do need to use debt.

Sometimes You Have to Use It

Some purchases require a credit card is one example of this. Most rental car agencies won’t let you use a car unless you have one–same thing with hotels. As we discussed, some purchases are too big not to use other people’s money.

Essentially, debt is pretty difficult to avoid. But the key is to not make credit cards and loans as your primary way to make purchases. Consider other alternatives. Also, when you do use debt, make it your priority to pay off.

Related posts: Weekly Wisdom: Steering Your Personal Financial Decisions in Interesting TimesThis Winter: How To Make A Debt SnowballThe Power of a Debt Free LifeHow Your Thoughts Affect DebtHow Technology Can Improve Your Debt Score

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