The word debt is a scare for many people. A large population fear being in deep debt or going bankrupt. For this reason, many of them avoid getting loans or credits even if it is available for them. From one generation to another, the message has been that debt is a bad thing. But in the 21st century, it is hard to operate without debt.
Are debts a bad idea? The answer is no. Some debts are good while others are bad. Good debt management help you to grow and boost your net worth. On the other hand, bad debts are ones you borrow for consumption purposes. Here are some situations when borrowing is a good idea.
Borrowing to invest
Imagine you have found a worthwhile investment opportunity that can change your life. Unfortunately, you do not have the cash to seize it. Your savings are far below the required amount. Would you let another person take up the chance?
In such instances, taking a loan is a good idea. The loan will help you get enough finances to invest. Also, the investment will pay up the loan and have other long term benefits. Borrowing to invest is a good way to boost your net worth. For instance, you can borrow to buy a home, invest in stock or real estate. To get some more inspiration for investments, see the top investing trends for the year reported by Forbes.
Knowledge is power, and it comes through education. When you enhance your education level, you increase your earning potential. People with higher education can easily secure better jobs that will earn them several dollars. However, education is not free.
You need to have some cash to fund your degrees. The good thing is that many financial institutions are willing to fund your education and charge some interest. Like investing in other areas, education loans are another type of good debt.
Higher education strengthens your net worth and opportunity for earning. But, always assess the marketability of your degree or niche. Some degrees are a bad idea and may lead you to a crisis.
A loan to pay your debt – and debt income ratio
Can you borrow to pay debts? Certainly, this sounds like an awkward idea. The desire of everyone is to become debt-free. In this essence, you need to create revenue and use it to clear your debts. Getting a loan for this purpose will expand your debt burden.
If this is your thinking, you are wrong. Sometimes it is a good idea to borrow and pay off a debt. Also, depending on debt income ratio. Which is important to not exceed over a critical point where a further loan just becomes another burden. The process involves taking a long-term loan to clear short-term loans that attract high-interest rates. This is a critical detail. Especially as short-term loans such as credit card debt is on the rise again, reports CNBC.
This aspect lowers your burden as you will have enough time to repay the long-term loan and ones coming with low interest. So, it enhances your net worth and saves you from becoming saddled with debt.
Wrapping up debt recovery solutions
In a word, debts are not always a bad idea. The purpose you are borrowing for is what makes the debt a bad or good one. A borrowing that results in boosting your net worth is recommendable. In other words, do not borrow to consume but to invest.