Borrowing money can burden you with years or decades of debt that prevent you from living your best life. At the same time, it can also open doors to investments, opportunities, and financial leverage that you would otherwise never have.
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Classifying debt as “good” or “bad” is an oversimplification. The same type of debt can become a burden or pay dividends in the long run depending on how you borrow, how much you borrow, and why. That said, let’s take a look at which forms of debt are generally worth it and which ones you should avoid.
For most, debt is the only way to home ownership
The best example of good debt is a mortgage you can afford. Most people don’t have six figures to invest in a home, but real estate remains one of the cornerstones of middle-class security and generational wealth.
“Buying a home is worth going into debt for as long as you can afford to pay the mortgage and all the costs of owning the home, including utilities, repairs and maintenance,” he said. said Jacqueline Gilchrist, founder of Mom Money Map. “A house is a precious asset. Depending on the market, a house can appreciate and increase in value over time.
Credit card debt is the bane of the American consumer
The first time you don’t pay your statement balance in full, compound interest starts working against you — and compound interest is a powerful opponent. As the holiday season approaches, most Americans will find that credit card debt is the type of borrowing most likely to get them into trouble – the kind of trouble that can take years to come undone.
“Credit card debt is considered bad debt because it’s used to fund purchases that don’t increase in value and may even depreciate,” said Lauren Davis, financial advisor and founder of The Moolah Project. “Additionally, credit cards typically charge high interest rates, which can make it difficult to pay off the balance.
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The right kind of business start-up loan can be good debt
Starting a business costs a lot of money and most entrepreneurs don’t have the capital to sustain their aspirational spirit. So a business loan that fuels what turns out to be a profitable business can be a worthwhile debt to bear.
“I think it’s worth going into debt to start or grow your business,” said Sully Tyler, an entrepreneur who has started three businesses. “I know it sounds like a risk, especially if you’re not sure if it will pay off or not, but by understanding exactly how much money you’ll need up front and budgeting for future costs, you can minimize the risk of failure.”
Tyler added that start-up loans should have negotiable interest rates, flexible repayment options and other safeguards in case your business fails.
Marriage Debt Is Bad For Financial Health — And Your Marriage
According to The Knot, the average wedding costs between $28,000 and $34,000 if you include the ring. For most people, that means five-figure debt, which is a risky proposition considering how many divorces can be attributed to money troubles.
“Starting your married life with debt from your marriage gives you one more hurdle to overcome on your way to marital bliss,” said Colin Palfrey, Chief Marketing Officer of Crediful. “Debt is one of the biggest causes of marriage breakups, so if you’re borrowing to get married, you’re on your way to becoming another statistic. Cut the ceremony down if necessary, invite fewer people, get a ring You can always upgrade later when you are more financially secure.
Investing can justify debt if you get returns to back it up
Bonnie Ling Thich, CEO and owner of Finsavvy Panda, believes the risky proposition of borrowing to invest can make sense for young people who can leverage the time to grow their investments well beyond the size of the debt.
Alternatively, it may make sense to invest instead of paying off existing debt under the right circumstances.
“For example, I delayed paying off my $38,000 in student loans in my early 20s to invest in stock markets and real estate when interest rates were still low,” Thich said. “It was worth staying in debt because it saved me my first $100,000 of net worth in my mid-twenties. As I held on to these investments for almost a decade, I was able to generate seven-figure net worth in my thirties.
Avoid borrowing to buy things you don’t need
So much toxic credit card debt can be traced to wasteful consumer spending. Several experts told GOBankingRates to avoid charging more than you can afford for dining out, and not to overspend on clothes or take vacations you can’t afford. expenses.
“Nobody needs the latest Apple accessory or a pair of Bose noise-canceling headphones,” said Jack Williams, founder of Handyman Review. “You might think your new smartphone will help you stay organized or your robot vacuum will save you so much cleaning, but before you’re done paying for your new device, the next big thing will most likely appear on store shelves. . .”
Student debt makes sense if the degree pays you
Like home ownership, borrowing is the only path to higher education for many Americans, and it can be worthwhile debt — as long as you don’t borrow too much or for the wrong degree.
“Education and training are necessary to stay relevant in the job market,” said Andrew Griffith, CPA and associate professor of accounting at Iona University’s LaPenta School of Business. “If one must go into debt to acquire this education and training, one should only borrow what is absolutely necessary to finance this education and training, and then only pursue programs that have more than a 50% chance of success. significantly increase one’s annual income while aggressively paying off that education debt in five years or less. In other words, one should always assess the expected return on investment associated with pursuing a particular education program before enroll in this program.
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This article originally appeared on GOBankingRates.com: What’s worth getting into debt – and what’s not