Did you know that 7 out of 10 Americans feel like they can never make debt elimination a reality in their lives? This is according to the study published on PewTrusts.org. It is revealed in their study that 80% of Americans carry some form of debt. Whether it is mortgage, credit card debt or student loans, they all have debt. The study revealed that most Americans have more assets than debt. However, you need to understand that one emergency could tip their financial situation over the edge.
What is more unfortunate is the 7 out of 10 Americans who believe that debt is a necessity. They do not like debt – but they have accepted the fact that they cannot live without it. How sad is that way of thinking?
We all want to eliminate debt, but the reality is, we need it as some point in our lives. At least, this is true if you want to expedite the growth of your finances. There are things that debt can bring that will benefit your financial life – at least, if you know how to use it to your advantage.
2 reasons why debt cannot be eliminated completely
Some people may think that those who opt to get into debt simply do not want to wait until they have saved enough for the purchase. There are also those who think that people who opt to be in debt are those who cannot make the sacrifices to allow savings to fit in their budget. They also lacked the foresight to just save for the expense instead of relying on debt to buy the expensive purchase.
While it is true that you can save for every purchase that you will make, that is not always the practical way to do things. Think about this reasoning. If you are renting an apartment in New York for $2,600 (the average rate), wouldn’t it be more practical to get a home loan worth $400,000, and pay the monthly amortization of the same price? Why wait for a couple of years to save up the amount if you can loan it and save on your rental costs in the process?
Apart from practicality, there are also two reasons why debt elimination is not entirely possible in our society.
The first is what we call, the credit score. There is an article published on USNews.com that mentioned how your credit score is actually more important than your GPA. Obviously, this is directed at college students. The article is encouraging students to take care of their credit history because it will probably be more important than their grades. For instance, their GPAs will not matter a few years after graduating because employers will soon start looking at their job history more than their grades. A wrong credit move, on the other hand, will stay on your report for the next 7 years – which will have an effect on your credit score.
Now why is this score very important? One of the reasons provided by the article is for your future purchases. When you have a low credit score, you will be given a high interest rate on your future loans. That can compromise purchases like your home loan or car loan. There are other things that will be affected if you will not take care of your credit score. It shows how responsible you are when it comes to your money.
If you want to keep your credit score high, that means debt elimination is not possible. A credit report, where you get the data to compute your score, requires you to use debt in order to gauge your behavior towards it. If you exhibit good behavior in handling your debts, then it will reflect well in your credit score. Deciding not to use debt is will not give you the chance to show how good or bad you are when it comes to handling your credit.
The next reason why you cannot pursue debt elimination is because of the expensive expenses that you need to spend on in order to improve your personal finances. Take for instance buying a home. We mentioned how it is more practical to just borrow money for this expense. However, it is very rare that people can buy it in cash. It is too expensive to do so. If you will save up for it and rent while you are still coming up with the funds, then you will be wasting money.
Borrowing money to buy a home makes more sense. By doing the right calculations you will know how much you can borrow so your monthly amortization will be the same amount as your current rental price. As you pay your amortization, you get to increase your home equity. Instead of making your landlord rich, you are adding more into your personal net worth. Not only that, if there is an increase in the value of your home, your net worth will benefit from that increase too.
Another expensive expense that you can make is putting up a business. Instead of slaving away in your 9-5 job, you can pursue your passion and possibly earn more because what you are doing is something that you love to do. Some people cannot pursue this potential because they do not have the capital to support the business that they want to put up.
These expenses are all expensive but you know that you cannot wait to save up for them because you are wasting the opportunity to grow your financial worth. The solution is to just forget about debt elimination and simply borrow the money that will get things started for you.
Three ways to define if debt will do you good
Now that you have the reasons why debt should not be eliminated, you need to understand how you can define the type of credits that will do you good. Not all debts can increase your personal net worth. Some of them are actually bad for you.
Here are three ways that you can ensure that debt will only do you good.
It must put money in your pocket.
Qualification number one is it should be able to put money in your pocket. An article published on DailyFinance.com said that debt costs you money – that is because of the interest rates. Instead of using that money to improve your financial situation, it goes to your creditors and lenders. While this is the usual scenario, there are debts that will put money in your pocket. For instance, when you buy a home, try to look for one that has a basement or garage that you can rent out. That way, the lease that your tenant gives you can be used to pay off the monthly amortization of the mortgage. If you price it correctly, there may be money left from your tenant’s rent to add to your monthly cash inflow.
It must create opportunities.
Another qualification that will tell you that the debt is good for you is when it can open opportunities for you. Take for instance student loans. Regardless of what you hear or read in the news, this is a good debt. You can get a lot of opportunities when you get a college degree. It allows you to seek out higher paying jobs after you graduate. Student loans becomes a necessity when it is the only way that you can get a college education. If there is no way that you can finance your college degree, then proceed with the loan because that is how you can open opportunities to grow your finances.
It must not cripple your financial future.
The last qualification that will make a good debt is when it does not cripple your financial future. You want to set up your future right so you are financially stable. This means the debts should not keep you from future financial opportunities just because your income is tied up to your debt payments. We’ve mentioned earlier that debt costs you money. Well this money that you will be spending on your debt is in your future. When you take on debt, you are setting up your future self to pay for the expenses of your past. Instead of being able to use your money to enjoy the pleasures of today, you are using it to pay for what made you happy in the past. Most of the bad debts are purchases that already mean nothing to you once you are paying them off. The good debt, however, are credits that does not compromise your financial future in any way. As mentioned earlier, it has to put money in your pocket – or at the very least, be able to pay for itself.
If you can follow these rules, then you do not need debt elimination to protect your personal finances.