In Financial Apprentice, we often mention that consumer debts make you poor; they take money out of your pocket and steal your freedom. In short, you should avoid consumer debt by all means, do not take loans, and do not use the credit card limit. Less significant payment obligations permit you to deal with your funds more successfully, use your riches wisely, purchase things you need, and handle unforeseen crises.
But are all debts so bad? Or are there reasonable purchases that require you to take a loan out? Today I want to answer these questions, because yes, sometimes it is worth borrowing.
We go for three types of debts that may be an option for you.
Mortgage loan
Buying a house is such a significant expense that few of us have enough cash to do it. Not everyone wants to wait, so we take a mortgage to realize the dream of having a place of our own, and there is nothing wrong with it.
If you have considered your options to buy or rent and find that buying is better, the mortgage debt is good. You get a home, which is a property and is not something you consume. In general, the house maintains its value or even increases in value over time and therefore is a reasonable purchase from a financial point of view. But beware! It is also debt, and mortgage payments can become a nightmare if you don’t take it under certain conditions. Remember that this debt will be with you for years! If you are thinking about buying a house, I encourage you to watch this video explaining the factors to consider before taking out a mortgage.
Loan for investments
You definitely should not take debts to invest money in the stock market because the earnings are unlikely to cover the loan payments, but you can consider taking debt to generate other forms of income. That is, take a loan, use this money to increase profits, pay off the debt, and in the end, are left with a higher level of income.
Invest the loan money in the following ways to achieve this:
- Training
- to gain new knowledge and skills, which will generate more income.
- Purchase materials and tools to do your job
- there is a big difference between buying a laptop to play video games and one used for work.
You should never purchase the first item in the example above with installments, but you can consider using financing to buy the second. Good debt works this way; you use debt to improve the condition of your finances. If you have an idea to develop your business, and the only thing that stops you is the lack of money, you can take advantage of the money from a loan.
Loans in a country with high inflation
The video below describes how to save in times of inflation. Our followers from Venezuela and Argentina mention how they take advantage of debts. Some of them buy products with a credit card, which they later sell for a higher price. Inflation is so high that the value of cars, electronic products, etc., grows faster than debt interest.
Comparing bad debt against good debt
Debt makes sense if:
- You buy a house in reasonable condition
- You buy something that increases in value over time, and you can sell it later, with a profit higher than the cost of the loan
- You invest the debt money to increase your income
Avoid debt if:
- Acquiring anything you don’t need
- Purchasing something that decreases in value
In conclusion, if you borrow for financial benefits, this is good debt. If you want a better cell phone, computer, another TV, or a car of another color, you can have them, but only when your finances allow it.
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