Build Credit: The Three Keys to Creating Good Debt
At first glance, the words “good” and “debt” don’t seem to be a symbiotic match, but there are indeed some instances where creating debt does generate a surplus of income or personal wealth. There are certain schools of thought that agree if a debt is going to increase your potential for income, it could be a good opportunity. However, many people don’t stop and think before they agree to take on a new financial responsibility. If you’re currently considering obtaining a debt to help get you through a specific situation you may want to keep these following advice in mind.
Always Question Your Motives
A good rule of thumb to follow when considering creating a debt is to ask yourself the following question.
“How is borrowing this money going to help me make money or get me out of debt?”
If you’re using credit to do your basic living, you’re not helping yourself pay down your debt, or even create new income. You may feel temporarily relieved, but in actuality you’re increasing your debt and just pushing off the inevitable need to pay until another day. If you approach debt from the perspective of using it help you create wealth, you’ll have a much healthier personal financial situation.
So, in short, if your motive is to create more debt, it’s not a good idea to keep digging yourself into a hole. However, if you are using the debt to increase your opportunities to generate more or new income, it may be the right move for you.
Determine What Is A Good Debt
An easy way to decide what a good debt for you would be is to determine to what degree that debt will increase your wellbeing or expand your potential financial growth. For some ideas, consider these five scenarios for creating good debt:
- Take out a loan to start a side business or to expand your current business. However, you’ll want to get the loan in your business’s name as soon as possible so that your liabilities are divided.
- Get a college education.
- Take a class or learn a skill that will help you be more employable. This can be anything from going to therapy to becoming a better communicator or even taking a sewing class so that you can sell your creations on Etsy.
- Consider getting a consolidation loan with lower interest rates.
- Buying a home or some other investment that is going to increase in value is also good debt, albeit with a bit of risk. Before you buy a home, you have to think worst-case-scenario: If this home never increases in value, can I always afford the payment?
Investing in Your Family
It isn’t a traditional approach to personal finance or debt to consider investing in your family, however, while it may not increase your revenue stream directly, it does increase the overall quality of your life and the future of your family. The main factor to consider before you agree to the debt is to honestly answer, “Can you afford to pay it back?”
If you don’t have solid proof that you can pay it back, it would not be financial prudent to consider it a good debt. The key here is establishing solid proof that you can pay it off. Many people have a feeling they can pay it back, but don’t run the numbers to determine whether that feeling is based on fact. To establish proof, you need to know exactly what you need to live on each month and exactly what income is coming in. If you have enough left over to cover the new debt comfortably, than it might be something of value to consider. Some examples of investing in your family include:
- Investing in your family’s future by sending your kids to college.
- Hiring a tutor for your children.
- Sending your overworked spouse on a vacation to relive their stress.
- Buying a home that your family is going to live in forever might be good debt even if it’s a seller’s market and the home is likely to lose value.
When it comes right down to do it, life is a balancing act. Some people preach that you should never use credit unless it can increase your income. All other debt is bad debt. That isn’t always the case, and you can’t live your life by absolutes. There are some times in life when you will need to use credit and pay interest for things that will increase you or your family’s well-being. The trick is in making educated financial decisions and balancing the risk of the debt versus the opportunities it will create.
How have you used debt to increase your wealth or help your family? Share your stories below!