When Does Debt Make Sense?

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There are many types of debt, and it can be challenging to determine how each type fits into your financial picture. Some people are adamantly opposed to all debt, while others see nothing wrong with charging even regular expenses. The responsible financial choice lies somewhere in between, although everyone should make the choices they are comfortable with.

Home Mortgage

For generations, the dream of owning a home has been held up as the sign that you are a responsible adult. That is changing somewhat, and people are starting to see that everyone does not live the same life, and what makes sense to one person may not make sense for another. Purchasing can make great financial sense. It is normal for homes to appreciate, gaining value in your investment while also providing you a place to live. Depending on where you live, your mortgage payment may be lower than rent for comparable accommodations. Buying a home is not for everyone, however. 

If you don’t plan to live in an area for more than a few years, your house may not appreciate enough to earn a return on your investment. There are expenses related to purchasing a home, and a quick resale can create a losing money proposition, even in a growing neighborhood. There is another factor about homeownership that people avoid discussing. Some people just do not want to be homeowners. If you are not interested in maintenance, and if you like picking up the phone and calling your landlord when something goes wrong, you may prefer to remain a renter. If you have no interest in spending your Saturday mornings mowing your lawn, homeownership may not be for you, and that is okay.

Student Loans

Student loan debt is another smart debt. Taking out student loans to pay for your education will pay dividends in higher earning power for the length of your career. While you only want to borrow what you need, paying for your living expenses with student loans can make sense. The freedom from financial worries it provides allows you to focus on school and the many opportunities it provides and connections it allows you to make. As an aside, the interest rates on student loans are generally favorable.

Credit Cards

It would be hard to argue that credit card debt makes good financial sense. Still, many Americans find themselves saddled with debt they accrued through a variety of life events. Whether you accumulate debt from living beyond your means or from paying for emergency car repairs, the result is the same. Interest rates are generally punitive, and it can be a challenge to get out of the hole you find yourself in. Using credit cards to pay for your everyday expenses is fine as long as you pay them off in full each month. Building up an emergency fund can prevent you from having to place unexpected expenses on a credit card. While some types of debt make sense and can improve your financial position, credit card debt is not one of those.