Debt is a bad word in financial circles: People are constantly talking about eliminating it, tackling it, consolidating it, and avoiding it. While I can’t argue the wisdom of these aggressive (or evasive) actions toward debt, there are times when debt isn’t a bad thing.
Personally, I’ve been debt-free a few times in the past, and I plan to be again. I am in debt right now, but I don’t feel bad about it. I used to view debt of any kind as taboo and unacceptable, but I’ve realized that sometimes loans are a tool that can be used to benefit your finances and position in life. From what I can see, my debt follows a healthy pattern — and as long as it can pass the following questions, I have no reason to regret it.
Two Questions to Help You Assess Your Debt
1. Is it temporary, or is it a lifestyle?
What’s your game plan? Being in debt at various times in your life is nearly unavoidable unless you have vast resources. If you’re like most of us, you can’t afford to pay cash for a dependable vehicle, a roof over your head, or a college education.
It’s wise to save in advance and pay up front as much as you can, but there will still be a certain amount you can’t afford without some help. A good question to ask yourself when you’re considering debt is whether it will be temporary or not.
Every debt you own should have a timeline. Mortgages have a timeline; car loans have a timeline; even student loans have a timeline once you’re out of school. You should either have a lender- or self-imposed plan for how and when you’re going to pay back each debt.
2. Is it worth it?
WHY do you need to go into debt? Even debt categories that pass the first question might not pass this one. For instance, financing a vehicle may be a necessary and unavoidable form of debt in an average household, but do you need two vehicle loans? Even if you need two vehicles, presumably doubling your debt and monthly financial obligation isn’t a good idea. Why not try to pay off one vehicle before financing another, or buy your second vehicle used with cash?
This might hit a few nerves, but our society is addicted to purchasing new vehicles every two to three years, whether they need them or not. Instead of getting their money’s worth out of a good vehicle, many families move from car loan to car loan without realizing they’re establishing a bad debt pattern.
As I said, not all kinds or debt are bad. There are times when going into debt means investing in your personal future — whether starting a small business or purchasing your own home. If you can answer “yes” to this question without any hesitation, then it’s probably a good debt to have.
Is Your Debt Good or Bad?
Look at your own debt patterns. Do you have the habit of going into debt as a crutch, and as a way to project your lifestyle beyond the reach of your income? Or do your debts represent responsible, thoughtful decisions to invest in your present and future financial success? Can you feel at ease about your debt, confident in your financial stability, credit rating, and game plans for payoff — or are you embarrassed to admit what (and for what) you owe?
Let us know your answers in the comments!