Many personal finance experts preach a message of fear that encourages a debt aversion. You’ve probably heard or read stories about folks who ended in a financial rut because they took on more debt than they could manage. However, debt in itself is not inherently bad – debt becomes an issue when not properly managed. I like to think of debt as a chainsaw that can help you cut down massive financial commitments such as buying a home into smaller manageable bits. However, a chainsaw when facing the wrong way can actually cut you off at the knees. This piece provides a contrarian outlook in support of debt with three reasons debt can be good for your finances.
- It can help you make more money
Investing is one of the smartest ways to increase your sources of income especially when you invest in assets that generate passive income. However, if you decide to save up investment capital, it might take some time before you save up enough money for a decent investment. Hence, you might miss incredible investment opportunities because you are still saving up your investment capital.
However, borrowing money for investment purposes in appreciating assets such as real estate could help you get started on your investment journey faster. How much money you’ll be able to borrow depend on your income, credit score, and other assets that you own. Nonetheless, you need to do your due diligence and ensure that you make smart investment decisions so that your ROI is more than the Interest payment.
- It can smoothen out knots in your cashflow
Irrespective of how smart you are with your income and your expenses, you’ll still have the occasional cash flow gaps. Maybe something happened and your salary for the month wasn’t processed in good time, maybe you lent a friend some money and he wasn’t able to repay you by the agreed time, or maybe you work a commission-based job where the bulk of your earnings is paid as an end-of-year bonus.
However, you need to objectively calculate your expected income and expenses, so that you can know how much money you can afford to borrow and repay without getting into financial troubles. Short-term debts offers can help you get the funds you need to tide you over until your cash flow finds a balance. If you refuse to take advantage of such credit offerings, you’ll be putting yourself under an avoidable financial and emotional stress that could have an adverse effect on other areas of your life.
- It can help you be disciplined in your spending
Many folks spend a great deal of money on lifestyle items and consumables annually – even though the spending happens in small bits with $5, 10, $25 here and there. Taking on good debt can help you make smarter financial decisions on how you spend money. You know that you have monthly payments to make for the servicing of your debt; hence, you’ll have an automatic scale of preference that allocates money to your debt obligations. The good thing is that the money you didn’t spend on consumables will in turn work for you via your investments (see 1) and set you on a faster path to financial freedom.