Conventional financial wisdom tells you that debt is bad and saving money is good. By this logic, debt should be avoided at all costs. However, as with most things in finance, it’s not really this simple. Yes, debt is a serious undertaking and one should not be flippant about taking on debt. Afterall, debt can quickly snowball out of control if you’re not careful and take you down with it. And yet, there are still times when acquiring debt is a smart financial move. Here are 3 instances in which acquiring debt is valid and the reasons why.
Going to college
College is expensive and most individuals are not able to afford higher education without some loans. While this can be understandably anxiety provoking, investing in your advanced education is generally a good idea, given you will complete your degree. Research consistently demonstrates that college grads typically make more money than people without at least a Bachelor’s degree. According to the U.S. Bureau of Labor, individuals who obtained a B.A. earned on average at little over $200 a week more than those with an Associate degree and almost $300 more a week than those with some college education but no degree. Now by no means is a degree a requirement to being successful, nor is it a guarantee that you will earn enough money to pay off your loans in a timely manner. At the same time, you will by default have more opportunities to earn more money available to you than if you opted out of attending college. So in this way, it might be a good decision to take on debt to pay for college.
Buying a home
Home ownership is largely considered a great investment because it typically will increase in value. Importantly though, this is because the land the house sits on will appreciate in value despite the fact that the structure itself will likely decrease in value. As Mark Twain said, “Buy land, they’re not making it anymore.” While this isn’t always the case (remember that ALL investments come with risks), most financial professionals would agree that real estate is one of the safest investments you can make. So taking out a mortgage could very well be a smart financial decision, given you do your research and shop around to ensure you’re getting the most favorable terms.
Starting a business
Starting a business can be one of the best ways to attain wealth by building a profitable business that can last for future generations. However, most businesses take on average two to three years to turn a profit. This means that you will likely have to acquire debt early on in the business development stage - this is merely a cost of doing business. As you start to build your business and turn enough profit, start paying the loan back right away. Eventually, you will pay the loan and be free clear to keep all the profits for yourself or to reinvest in your business.
Debt can be a necessary precursor to building your wealth, and it can also be you or your company’s downfall. It is important that you never acquire debt without serious forethought and a realistic plan for paying the debt off as quickly as possible. However, in the right circumstances, taking a loan to jumpstart your future success is advisable. Just be sure you are only taking out as much as debt as you need to accomplish your goals and that you take the time to shop around for the best terms.
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