In part 1 of this series, we learned why some debt is worse than others. Using credit card debt as a specific example, we saw why consumable assets shouldn’t be purchased on credit. In part 2, we’re going to see examples of good debt and learn why it’s actually healthy for your financial future.
What do you consider a good investment of your money? Real estate? A house? A college education? These are all examples of purchases that will increase in value over time. For example, a house that costs $100,000 might be worth $150,000 within a few years. The improvements you make to the house and surrounding land will add to its value. A college education will open the door to higher-paying jobs, making it a valuable investment indeed. But what does all of this have to do with your debt?
Healthy debt is good debt. Mortgage loans and student loans are examples of healthy debt. Yes, you pay interest and lock yourself into a repayment schedule. But in the end, your returns (property value, employability) will outweigh the price of your total investment. $50,000 in student loans sounds steep, but what if that education results in a job making $80,000 a year? It’s easy to see the value of healthy debt. For that reason, it’s okay to go into debt to make these types of purchases – as long as your debt load is healthy in relation to your income and other expenses.
Mortgage loans and student loans are also known as “installment” accounts. You repay a fixed amount in regular installments. This is a good way to build a positive credit history. As long as you make your payments on time, you will cultivate a good payment record. Just be sure that your creditors report to the major credit bureaus. That will make you look good to lenders when you go in for your next loan.
So how much debt can you really afford? What looks best to creditors: no debt, some debt, or a moderate amount of debt? In part three of our series, we’ll learn how to calculate a healthy debt-to-income ratio that won’t leave you overburdened by bills.
Check out our free 15-page report, ‘Know Where to Draw the Line on Debt’. It’s full of information, calculations, tips and tricks for keeping your debt in check. This report is offered to our readers as a thank-you for visiting quicklyoutofdebt.com.