Debt Is A Great Tool To Build Wealth - If You Use It Properly

We’re usually led to believe that debt is terrible. Carrying a large load of credit card debt is something that didn’t happen a few generations ago. Older individuals might say something like, “If you can’t afford it, don’t buy it.” That’s usually good advice. It isn’t a good idea to carry a lot of credit card debt, but there are times when debt can be a good thing.

Check out some good reasons for going into debt: 

  1. A great investment opportunity. An investment opportunity could be in real estate, the stock market, a business, or some other prospect. Regardless of the type of investment, if you have a chance to earn more than you’re spending, debt could be profitable in the long run.
    • For example, borrowing money at 5% and investing it for a 15% to 20% return would be a good reason to take on some debt.
  2. Buying a house or real estate investment. Most people won’t ever save enough money to buy a house without borrowing money. Because a house will usually appreciate, this is another instance where borrowing money can make you wealthier in the long run.
    • If your mortgage payments are the same or less than your current rent payments, a home loan could be considered “good debt.”
  3. Starting or growing a business. This is another example where you’d be borrowing money to make more money than you would payback on the debt.
  4. Borrowing money to college can be a good reason for going into debt. However, be cautious about taking on too much debt for college. Many students borrow carelessly, and it takes them decades to pay it all off.
    • If you want to be a doctor, lawyer, or engineer, you’ll need quite a bit of training. Those years you’re spending in college can be pretty expensive.
    • Going into debt can be a good thing if it allows you to get into a lucrative profession.
    • If you’re going to borrow money to go to school, ensure that your chosen profession is in demand and that you can earn enough to pay off your loans and still have enough left over to live on.
  5. Using a lower interest rate loan to pay off higher interest rate credit cards. If you have credit cards with interest rates from 18% to 22%, but you could get a home equity line of credit at 6%, taking on that low-interest loan could be considered good debt.
    • Ensure that you don’t start charging things and running them up again once you pay off those high balances on your credit cards. Use the low-interest rate loan to help you get out and stay out of debt.

People who tell you that going into debt is terrible are genuinely trying to be helpful. However, there are times when going into debt can be a good thing.

If you’re going into debt to pay your monthly bills or if you’re running up credit card balances to buy a bunch of things you don’t need, this is considered “bad debt.” But, if you’re borrowing money for an investment, that can be considered “good debt.” Debt can be helpful as long as you’re using it to make a profit and come out ahead. 

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