Debt has become such a dirty word these days, and in many cases, there is a good reason for that. Americans are saddled with unheard of amounts of debt and the problem is not just going to go away. In some cases, debt is absolutely necessary, while in others, it is beneficial. The key is knowing which kinds of debt to avoid, and which ones to focus on. Let’s take a look at some scenarios of taking on debt, and whether or not it would be worth it.
“Stuff” You’ve just bought a new house or moved into a new apartment. It’s looking a little bare around the edges and you feel the need to start nesting and making the place look nice. You don’t have a lot of money to spend on new furniture, appliances or electronics, but you really want to have some new stuff. If you’re sitting on the floor, you may even need new stuff.
So, you head off to ye olde furniture mart and stock up on everything you’ve ever dreamt of owning for your home. You use the store’s “no interest for twelve months” plan and immediately stop worrying about how you’re going to pay that off. Soon, those payments start to stack up and at the end of those twelve months, you get slapped with a really high rate that puts you into debt even further.
This is a prime example of how going into debt like this is not worth it. While we all need furniture, we don’t necessarily need the best or the most expensive models. You can get an awesome couch by trolling through classifieds and spending less than $200. The same is true for appliances and electronics. Never fall prey to those “no interest” deals, they will only end up hurting you in the end.
Investments. Now let’s look at a little different scenario. In this case, you have an opportunity to get a fantastic deal on a house that is used as a rental property. The tenant has signed a long term lease and maintenance costs are minimal. You don’t have enough in the bank to buy the house outright, so you consider getting a mortgage for the property.
Your mortgage will cost $550 per month, but the tenant is paying $850 a month in rent. That means that even though you are going into debt on that property, you’ll actually be making $300 extra a month as a result. This is a prime example of how going into debt can actually do you a favor. The key is understanding the basic concept of good versus bad debt. Good debt is an investment that will return you with an income, while bad debt is typically something that is going to depreciate and end up costing more money over the long term. Keep these principles in mind when you’re considering buying a property, or even new furniture. They’ll help keep everything in the proper perspective.