3 Reasons it is OK to Use Debt (and 4 iffy Ones)

The first article in this series (published October 24, 2013) described how to become a debt slave. Debt is a powerful tool that has a place. This article describes “Good Debt” and “probably good debt”.

DebtSlave8I have been in debt and I have been debt-free. I was severely hurt by the crash of 2007 because I was chasing capital gains in the real estate market using a LOT of debt. This was debt slave method number 4 in the prior article. PLEASE avoid my mistakes!

Debt goes by a lot of names like loan, liability, mortgage, leverage, OPM (other people’s money) and borrowing. It is simply money that someone (or an institution like a bank) lets you use with strings attached. Returning the money at some future date is nearly always one of those strings. It does not matter what your situation is at that future date and the consequences or missing that payment are usually very bad for you.

 There are good reasons to borrow.

  1. To generate income – if you can invest the money in a way that earns more than it costs AND the risk is acceptable. CAUTION! In this fast-changing world, what was low risk last week can become wild speculation tomorrow. If you have debt, you have to regularly re-evaluate the risk.
  1. Create a NET reduction in expenses – you can pay off some obligations by borrowing at a lower cost or more favorable terms.
  1. Emergencies – you have no choice but to borrow because of circumstances beyond your control. A good example is paying the doctor’s bills for an injury.

 There are some cases where borrowing MIGHT make sense

  1. Student Loans – some will generate income. If the skills you learn increase your value in the workplace enough to pay the loans off in less than 5 years, the student loan meets good reason number 1. WARNING! Student loans can be the worst trap imaginable.
  1. Car Loans – If reliable transportation is vital to your livelihood, a car  loan meets good reason number 1.
  1. Home Mortgages – if you can buy cheaper than rent, a home mortgage  meets good reason number 2. If housing prices are going up faster than you can save the money you might consider violating debt slave trap number 4 as long as your eyes are wide open! There are a lot of transaction costs in purchasing a home and that means you must intend to own that home for several years.
  1. Starting a business – This is a calculated risk that you can make good reason number 1 happen. The risk is falling into debt slave trap number 3. Look for a future article on bootstrapping as an alternative to traditional debt

 Are you making the right decisions about debt?

 


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