We all accumulate debt at some point in our life. There is really no way around it. Especially when we consider the two greatest costs we will face – buying a home and funding our education. Thus, it is good to accept the fact that debt is not a complete negative and if used wisely can be a great asset.
First of all let’s consider what we should or should not use debt for. As mentioned earlier using debt to purchase a home (a mortgage) and fund your education is always recommended. The reason it is recommended is because both of these expenditures are actually investments. Hopefully, what you invest in your education will pay dividends later in terms of higher salary and increased job prospects. Buying a house is usually one of the most stable and beneficial investments you can make considering that real estate is pretty stationary and the other alternative is to rent and build no equity. Therefore these two investments are the first two to consider when acquiring debt.
There are other positive times in which to incur debt. One such time is to invest in a business or some other income producing activity. The key in determining whether it is a good decision is to look at the income potential or what effect it will have on your long-term financial picture. If the money you are spending is likely to make you more money in the long term then it is probably a wise investment.
Of course it is not the positive debt that most of us incur. Usually it is of the negative variety. Negative debt is any debt used to buy short-term consumer goods such as clothing, entertainment, electronics, etc. All of these items have a very short life span and usually have no value when we decide to sell them. Therefore the money we spend on them is really money that we can never get back. But the fact is most people end up financing purchases for televisions, stereos and computers. It would be best to make these purchases in cash.
A vehicle is another thing that many people accumulate debt for. Though it is something that you will probably lose money on, it is also something that most people cannot afford to pay cash for. Therefore this is a debt that most of us have to incur. It does help to take a look at the resale value of the car you are looking to buy to determine how much money you are likely to get back when you decide to sell the vehicle. This can be the difference between a poor investment and one that allows you to recoup some of your money spent.
One important aspect of debt that most people neglect is simple record keeping. You should have a file created in which you keep careful track of all debt you accumulate along with an idealized payoff plan. If you can simply do this you will have more control over your debt than the average consumer. Record keeping is the first step toward controlling your finances and it applies to debt as well as it does to investments.