We are conditioned to think of debt as 100% negative. And, it makes sense: all debt, no matter what kind, is a negative figure in your assets, reducing your family’s net worth. But, the full picture is not that simple. Some sorts of debt, over time, can increase your stability, your assets and your ability to make money. A few common types of debt and their effect on your financial well-being.
Without a home loan, it is nearly impossible to buy a house. Mortgages are relatively low-interest loans that allow you to build equity over time. As your equity grows, your financial stability does, too. With regular payments and a generally appreciating housing market, a home can allow you to build a secure place to retire or a nest egg to use toward your retirement destination.
Of course, not every mortgage situation is built alike. If you purchased a home during a time of high real estate prices or got a loan with a variable interest rate, you could wind up with a property that is worth far less than you owe. Always research long term trends and research your mortgage agreements carefully before you commit.
It used to always be assumed that student loans were good debt because they led to a higher paying career. But, increasing education costs and changing job markets mean that student debt needs to be entered into carefully.
Research growing fields to ensure that your degree will lead to the best possible job prospects. In general, college graduates earn more than those who lack degrees. But, majors and the areas where you eventually choose to live will determine how valuable a student loan is as an investment in your future.
Credit Card Debt
Debt for vacations, clothing, jewelry and technical toys is almost always a negative debt. These items are almost never assets that will grow in value. Any time you want to buy something on credit, ask whether you have the money to pay the debt off in full when your credit card statement comes. If the answer is no, carefully consider whether future you would be happy living with less money because you of the present wanted to splurge.
Car loans are another type of debt that, in general, do not help you build your net worth over time. However, there are a few other factors to consider that can make them worth your while. If you live far from your job and need an especially reliable car, a car loan can be worthwhile. It might allow you to buy a newer model, which enhances your job security. Also, if you are in the process of rebuilding your credit, an installment loan can help increase your score. Just ensure that you pick a loan with affordable payments that has no penalties for prepaying and will give you the opportunity to make adjustments as your credit improves and you grow your financial worth.