Q: Is it ever a good idea to take on new debt, or should we avoid it at all costs?
Debt isn’t inherently good or bad. But how you use this financial tool can potentially have positive or negative effects on your financial situation.
For example, you may have heard that credit card debt is “bad debt.” Yet scoring a new card with a no-interest promotional period can be a major asset for a responsible entrepreneur trying to jump start a new business. Likewise, while mortgages and student loans are sometimes considered “good debt,” if your home’s underwater (meaning you owe more than it’s now worth) or your expensive degree doesn’t help you land a good job, it can feel pretty bad.
Along the same lines, paying interest isn’t necessarily good or bad either. It’s simply buying yourself more time, like being able to pay off a mortgage over 30 years instead of purchasing a home in cash upfront, or delaying paying for college tuition until you’ve graduated.
Before taking on any kind of new debt, make sure you understand the tradeoffs. Ask questions like: What’s the interest rate, and total cost of borrowing the money over the life of the loan? How much can I afford to pay each month, and is that worth the amount of time I’m buying myself?
Ultimately, making the right decision is all about understanding how the debt works and having a plan to pay it down as efficiently as your budget allows.
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September 6, 2017