Debt – that little four-letter word you’ve been told your entire life to avoid like Ebola.
You know that debt leads to only one thing and that’s financial trouble.
You’ve been taught to associate debt with over-the-top impulse spending. When you hear the word – you immediately think of someone that went out and purchased a whole bunch of stuff and put it on credit cards with little or no thought as to how they’d repay the money.
You use your credits card sensibly by paying off their balances at the end of the month and you even chose to buy a used car so you were able to pay cash for it.
Now here’s an article with the headline that maybe you should have some debt – because you could use it strategically.
While this might be hard to believe, it’s definitely the truth.
When you can’t avoid debt
Whether you like to think of this or not there will be times when you just can’t avoid debt. If you intend to buy a home, you will need a mortgage. That’s the first strategic way to use debt because the house you buy now will undoubtedly be worth a lot more 10, 15 or 20 years from now.
Debt can also allow you to purchase things that you need but you’re unable to pay for even through savings. As an example of this, your roof could become so damaged you would need to replace it and using debt to get the job done would be using it strategically to your advantage.
Using debt to further your education
Of course, it would be great if you could get your education paid for with a scholarship and grants or by your company or by winning the lottery but for most people this just isn’t the deal.
Today, in the 21st century, it’s almost impossible to have a good career without at least an undergraduate degree. And in some careers, you’ll need at least a Master’s degree or even a Doctor’s degree.
So how could you pay for it?
You’ll need to enlist the help of student loans.
But, again, this is strategic debt because when you get a higher education you’ll be more qualified to obtain better and better-paying jobs and, therefore should have a much higher income over your working lifetime
If you get federal student loans you won’t have to begin repaying them until you have graduated and gotten your degree – so long as you remain in school.
In addition, there are a number of types of student loans available that make repayment practically painless.
Two of the best of these is the Revised Pay As You Earn (REPAYE plan) plan and the Pay As You Earn Repayment plan (PAYE plan). Both these plans are income-contingent meaning that they are tied to your net income and their payments can’t exceed 10% of it. Naturally, both of these have requirements you would need to familiarize yourself with and, with both plans, your monthly payments will not remain the same as your income changes and your family grows in size.
Using debt to create good credit
Again, like it or not, the time will come when you will need to buy a car or a house. When this time comes, you will need to have good credit.
You may think you have good credit because you’ve been paying off your credit card balances at the end of every month but you don’t. You’re what’s called “credit invisible”. And potential lenders will be hesitant to loan you money because you basically have no credit history.
Debt to the rescue.
What you need to do is purposefully create some kind of debt. Of course, if you want a good credit history you’ll have to pay off that debt in a timely manner. And this doesn’t mean you should use a credit card to just go off and buy things willy-nilly. But you should charge some things on a credit and then pay off less than your balances for a few months. If you don’t have a 0% interest credit card, you might want to get one and then use it to build your credit as this would save you from having to pay any interest.
Using debt to start a business
Would you like to work for yourself or start some kind of a business? If so, there are a lot of things you’ll need that aren’t cheap. You may be required to purchase special equipment or build up inventory on top of your normal operating expenses. Plus, you’ll need to pay yourself something and there may not be enough money left over after you’ve covered all your business expenses
The smart choice here would be to get a short-term business loan so that you’d have the ability to make cover your expenses. Get one of these loans and this would help you get your business up and running, which, in turn, will help you earn money.
Most people never start a business because they’re afraid of the risk involved in getting a loan. But if you wait until you’ve saved enough money to get your business off the ground, it will probably never happen or if it does it may take a long, long time. This, again, is an area where you could use debt strategically and it might pay off in a big way. Plus, the interest you pay on the loan will likely be tax-deductible.
Using debt to acquire property
We’ve already discussed the first strategic way to use debt, which is a mortgage. Debt can be used to buy income property, which could literally help you on your way to becoming a millionaire.
The interest you pay on a mortgage will likely be tax-deductible as well as the interest on any loans you use to acquire income property. There are literally thousands of wealthy people who started out borrowing money to fix and flip a house, used the profit to buy a couple more fix and flip houses and so on to the point where they now own multiple apartment houses.
Want to know what is bad debt? Here’s a video that explains bad vs. good debt and the fact that most people don’t know the difference.
Don’t get totally turned off
Most of what you have been told about debt being bad is true. But don’t let all of its bad press turn you off. There are certain kinds of debt that can be beneficial. It can help you further yourself in life, buy a home or start a business. In other words, when used smartly debt can actually be a good thing.