Stay out of debt. You may read in an article about personal finance along with invest in a house. Unless you’re one of the rare people who has the cash to pay for a house, how are you supposed to do both of those things? Advice about when to borrow money and what constitutes good debt can be confusing, but there are a few points you should keep in mind.
Good Vs Bad Debt
Remember that ultimately, good debt is the kind that helps your financial situation and increases your overall wealth in the long run while bad debt decreases it. This is one reason credit card debt and other types of consumer debt are generally considered bad: you nearly always use it to purchase things that are not going to appreciate in value and thus will not build your wealth.
Interest
One of the reasons staying out of debt is so important is because of interest. This is the amount that you pay on top of the original amount you borrowed. When you’re paying interest, you’re basically paying someone for the privilege of borrowing money. Interest rates on money you owe can outpace interest rates on money that you invest. When you look at it this way, you can see why it makes more sense to save up for something like a TV than to pay interest on it. However, there are certain types of loans that it still makes smart financial sense to use.
Student Loans
You may not get anything tangible besides a diploma out of the money that you borrow for a college education, but your life will be enriched in many different ways. From a financial standpoint, you are most likely in a position to make more money than you would if you didn’t have a degree. Because the boost to your income is greater than the amount that you would pay in interest over a lifetime, a student loan is still considered a good type of debt to take on. It’s also important to remember that you aren’t necessarily stuck with the original terms of your loan. It may be possible to refinance your student loan into a new one that offers a lower payoff plan or other options that are better than your current plan. You can look online for lenders who may offer a student loan refinance.
Business Loans
Like student loans, a business loan can increase your profits in the long run. If you’re an entrepreneur, you may want to look into a low-interest business loan in order to jump-start your business growth.
Buying a Home
This might be the ultimate good debt. A home nearly always increases in value over the long run. In addition, there are tax breaks associated with having a mortgage. You can borrow against equity in your home. Some people aren’t comfortable with owing any amount of money and would prefer to pay cash, but a mortgage can be a great tool for wealth building over a period of years or decades.
