People love to spend money, and they'll come up with any number of reasons that they just NEED to go into debt.
They will tell you things like, “I'm only using this credit card so that I can build my credit!”. Or, “I'm only buying this new car because they're giving me such a low interest rate!”. Or how about this one, “I don't have the money, but I need this new outfit because I haven't bought any new clothes for a while”.
People are very quick to give you reasons why they should go into debt, but they will often ignore all the reasons why you shouldn't go into debt. I'm going to list some of those reasons here, but first, here are the few situations where I would even think of using debt (but only if I really couldn't do it any other way).
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Times I would find debt acceptable
- Buying a house: I don't know of too many people who can afford a house without taking out a mortgage. I'm a big proponent of saving up for things you buy and not going into debt, but even I realize that almost nobody would be able to buy a house if they had to pay for it all in cash. At the same time, i do believe that people should make sure they're buying a house they can afford, and that they're saving at least a 20% down payment so that they can avoid private mortgage insurance. Also, try to get a house where you can get a 15 year fixed rate mortgage, instead of a longer term and/or variable rate mortgage
- College expenses: I am OK with people taking out some minimal loans for schooling if it is absolutely necessary. I would prefer that people do other things to avoid the loans including working during school, going to an in-state university with lower tuition, and working hard in high school to get scholarships and grants to pay for your schooling. If parents can help out as well, that is wonderful, but I'm not sure I would ever have parents pay for everything. Helping to pay for your own schooling can really help get you more invested in your own success. Check out my article on the topic here.
These are the two main areas where I would even consider taking out a loan.
Howard Dvorkin, founder of the nonprofit Consolidated Credit Counseling Services says that we need to ask ourselves if we're going into debt for an asset that's going to appreciate, or one that's going to depreciate:
Ask yourself if it's [the asset] a builder or a loser. An education enhances your job prospects and allows you to build greater wealth, and a home increases in value over the long term,” he says. On the contrary, something like a car is a loser. It loses value as soon as you drive it off the lot.
There may be a few other narrow circumstances where I would consider taking on debt, but those instances would be few and far between. In most cases I think it is wiser to save up for the things you'll need to buy.
How “good debt” becomes “bad debt”
When people go into debt, they often go in with the best of intentions. But even the best intentions can be turned against you and so called “good debt” (not sure I really believe in that) can quickly become “bad debt”. Here are some ways to keep your debt from turning against you.
- Don't take out more debt than you need to: Get just enough to cover expenses, and no more. People will often make the mistake of borrowing more money than they need to pay the mortgage or tuition, and they end up having higher payments, and paying more interest than it is really worth.
- Make your payments on time: This may seem like it is a no-brainer, but it is a big sticking point for many people. If you make late payments even for just a couple of months, your credit score will suffer.
- Don't be lured by easy credit: Often the high credit lines we receive and favorable repayment terms are so attractive that we are lured into buying things that we don't need. Then when life happens and we need that money for unexpected expenses (they WILL happen), we fall behind. Think twice before buying things you don't need, and when you buy those things – save up for them instead.
Reasons to avoid debt
For me I have been convinced through our classes with Dave Ramsey's Financial Peace University that debt is to be avoided in most cases, and we're doing our best to do just that. But if you're not convinced, here are a few reasons that YOU should avoid debt as well.
- Debt assumes things about the future: Scripture clearly says, “Do not boast about tomorrow, for you do not know what a day may bring forth” (Proverbs 27:1). When you commit yourself to payments over time, you are assuming that you will have no pay reductions, no loss of job, and no unexpected expenses. When you assume, you will be disappointed.
- Money borrowed today mortgages your future: Money you borrow, and interest you have to pay ends up working against your future net worth. Instead of investing money and enjoying the returns of compounding interest, you're losing money, and lowering your future standard of living for quick gains today.
- Debt encourages impulse buying and overspending: When you have an easy way to spend money you often don't stop to think about whether you really NEED something. Also, people who use credit have been proven to spend more than those that save and spend cash. Instead of buying things right away on credit – never buy anything expensive without waiting at least 30 days first, and always save up for it.
- Using debt teaches bad habits to your children: When you casually use debt to purchase things you want, and as your safety margin instead of using your saved assets, it teaches bad money management to your children. They will see debt as acceptable and learn to use it in the same way you do, instead of learning to save for things they need.
- Being debt free makes YOU free: When you don't have debt, you become more free to do what you want with your money whether that is investing and saving for retirement, saving up for things you want, or giving to charities you support. When you're in debt, you're a slave to the lender.
Those are just a few reasons why I think going into debt is a bad idea. I'm sure if I thought about it I could come up with about 20 more.
Have you thought about how you use debt? Are you using debt in a wise way, or in a way in which it harms your prospects for the future? Leave a comment below with your thoughts.