In some corners of the personal finance advice world, getting into debt is just about the worst thing you can do. And yes, some forms of debt — particularly those that charge high interest rates — can keep you locked in a cycle of owing money for years.
Still, there are times where taking on debt serves a purpose in your overall financial picture. Debt isn’t always bad, though there is always a risk of getting in over your head. It’s simply a tool you can use to afford a very large purchase without draining your savings.
“I think it’s so important for people to not be afraid of debt, but instead to look at it as something you can use to your advantage,” says Kara Duckworth, a certified financial planner and managing director of client experience at Mercer Advisors.
Here are a few examples of when the ability to borrow money can come in handy.
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For something that may go up in value
Debt is often categorized as good or bad, depending on the reason you borrow money and how much you’ll pay in interest.
“Good debt can help you move forward with your career and life,” says Mark Reyes, a certified financial planner and senior manager of financial assistance at financial services app Albert. “On the other hand, bad debt can hold you back from reaching your goals.”
Mortgages are commonly cited as an example of good debt, since a home can appreciate in value. “That’s not a bad debt to have; it’s going to put a roof over your head,” says Bill Hampton, a certified financial education instructor and CEO of Hampton Tax and Financial Services in Atlanta. Of course, borrowing more than you can afford or not understanding the terms of the loan can cause financial risk.
Student loans are another generally agreed-upon example of good debt, since your education can boost your lifetime earning potential. According to Hampton, “You’re going to be in debt for a number of years, but it’ll get you a higher-paying job. But if your major doesn’t support your debt, it could hold you back.”
To fund a major purchase
Now for the bad debt: credit cards. Not only do they charge high interest rates, but you can keep putting purchases on them even if you still owe money from prior months. It’s easy to end with a balance that keeps growing, no matter how much you try …….