Friday, February 21, 2020 / by Ken Couture
Debt is typically considered a four-letter word when it comes to personal finance.
But there are moments when going into debt can be a good idea.
It depends on a few factors, including the interest rate you’re paying on the debt.
If you have a debt that you’re paying 5% interest on, many financial experts advise that you could earn more by investing the money rather than use it to pay off the debt. Note: You should still make your regular payments — we’re talking about the additional money you’d use to pay off a debt faster.
And yes, there are plenty of life events for which you should not go into debt, but there are good reasons to go into debt — and ways to keep from going too far. Here’s what you need to know.
Here are four life events when debt might not only be necessary but a good thing.
1. When you take out a mortgage
If you have a quarter of a million dollars in cash hiding under your couch cushions, by all means pay for a house in cash. (Also, your couch must be incredibly uncomfortable.)
If you don’t have that kind of spare money, you’re like most home buyers, who have to take out a loan to pay for the bulk of their purchase.
And as scary as a six-figure debt can be, repeat after me: Real estate is an investment.
Why does that matter? Because buying a house isn’t like paying for a vacation, furniture or even a car — it typically appreciates in value rather than depreciates. So over time, real estate will be worth more than what you paid for it (probably — all investments come with risks, you know).
2. When you start a business
If you want to make money, you need to have money (said the rich person to the poor entrepreneur).
Starting your own business often requires upfront capital to get operations going. But if you don’t have a stash of cash to fund your venture, your business could fail before it has a chance to thrive.
And if you choose to empty your savings or use credit cards to fund your business, you could end up in more debt than if you took out a small business loan with a lower interest rate.
3. When you enroll in college
Ideally, you wouldn’t need loans at all to go to college. You and your parents would spend your childhood saving for college and supplementing that with scholarships, so you’d leave school debt-free.
And maybe you’ll do that.
But remember that a college education is still a fairly solid investment in your future — the Federal Reserve noted the average rate of return for a bachelor’s degree in 2019 remained high at around 14% — a solid return if you consider direct federal student loans offered a fixed interest rate of less than 5%.
4. When you need medical care
We have ways to save on medical costs and to figure out what to do if you can’t afford your medical bill. But in the end, this is your health.
If you don’t pay for medically necessary treatment because you can’t afford it now, you’ll likely end up paying more for a pricier treatment later — or worse.
And here’s the thing: Unlike your mortgage lender or credit card company, your doctor or hospital almost certainly doesn’t regularly report missed medical payments to the credit bureaus. That means that unless your medical debt becomes delinquent, it won’t affect your credit score.
Just a friendly reminder that this article is not a free pass for going into debt. Anything you put on a credit card is going to result in an interest rate that will leave you paying for an impulse purchase long after you forgot why you absolutely had to have it.
But if you utilize debt in a way that lets you grow your money in the long term, a dip into debt could really be worth the trouble.