Debt, as we all know, is bad. Or is it really? We have been taught all our lives to avoid it. Being in debt is considered something shameful, as if the person in debt is incompetent somehow.
Even politicians talk about too much debt all the time. Most candidates run on the platform that he or she will reduce debt and make the government debt-free. Debt is largely perceived as a catastrophe on both personal and organizational levels.
Debt is simply the amount of money a person owes in total to another. People with means do not need to borrow money. So, having to borrow money indicates economic hardship. However, economists in recent times have countered the traditional view of debt as something that is really bad and should be avoided at all times. It, experts say, can be good.
How so, you may ask. After all, going into debt can push people into a vicious cycle of borrowing and spending. Financial experts generally agree that there is good and bad debt. The difference between the two is that good one can improve your overall finances. On the other hand, bad debt pushes you deeper into it. Yes, it sounds confusing.
Think of it in this way. You borrow ten bucks. You haven’t paid it all back, so you are technically in debt. You use the 10 bucks to buy a loaf of bread. Then you sell this loaf of bread to another for 20 bucks. Now you have enough money to pay off your debt, and in the process you have also made extra money, thus increasing your overall wealth. Debt that can improve your net worth in this manner is considered good debt.
Now, say you use the aforementioned 10 bucks to buy a loaf of bread that is a day old. You can only sell it for 5 bucks. You now owe more. This is the nature of bad debt.
To better understand how debt can actually be good for you, consider the following examples:
Borrowing Money to Get an Education
Student and installment loans have accrued much controversy in recent times, just as debt has in general. Population statistics show that people with college degrees on average make more money than people without. People who have Master’s degrees and PhDs make even more than Bachelor’s degree holders. Conventional wisdom is that the more educated you are, the better off you will be. So, borrowing money to pay for a college degree is normally a sound investment. However, the investment can go sideways, depending on the economic situation, demand for jobs in the field you choose, and the median pay for your college major. In general, those who have college degrees in the STEM fields fare quite well later in life. So, in this regard, the debt you incur from student loans could actually be good for your life.
Taking out a Mortgage to Buy a House
Shelter is one of the most basic human needs. Most people don’t make enough money to buy a house with a single payment. Rich and poor alike depend on mortgages to buy houses. Your mortgage is not bad for you if you manage to buy a house in a good neighborhood. Value of property, unlike possessions like vehicles, goes up over time. Land always has an intrinsic financial value attached to it. So, even if you are in debt right now because of your mortgage, in 20 or 30 years, when it’s paid off, you will be richer.
Borrowing Money to Build Credit History
What makes student loans, mortgages and installment loans possible? Good credit history. Having a credit history and a good score establishes you as a responsible borrower. If lending institutions perceive you as a low-risk borrower, you will have no trouble borrowing money for good investments like buying a house. Once you incur debt to build a credit history, this debt must be gradually paid off to maintain your reputation as a good borrower.
Using Loans to Invest
Investing is one of the best-known ways to increase your wealth over time. So, if you don’t have the initial capital to invest, sometimes borrowing can help. However, these investments must be lucrative and safe enough so you can pay back your creditors and turn a profit.
As you can see, debt is not always bad. Learn more from this great article at BankRate.com. Whether debt is good or bad depends on what you do with the borrowed money. Credit card debt, expensive vehicle loans, and debt incurred buying consumables like clothes are all examples of bad debt. These types of debt do not increase your wealth over time. So, aim in your life to incur only good debt, and avoid bad debt.