It is possible to live debt-free through careful management of your finances. However, that is not necessarily a smart choice. Only a few people in the world make enough money to pay for some of the most important purchases in life. For instance, if you need a home, car or to pay for college, you will most likely need a loan.
Discerning Between Good and Bad Debt
When considering taking a loan, the most important consideration is if it is good or bad debt. Good debt is an investment whose value will grow or guarantee you an income in the long term. For instance, taking a student loan to pay for college is good debt. For one, a student loan comes with low-interest rates. Besides that, going to college increases your potential income in the future.
A Small Business Loan is Good Debt
If you want to start a business, you probably do not have all the capital needed. In such a case, taking a loan is an example of good debt. Being self-employed is a positive move in life. You will be able to avoid depending on third parties to keep your job. Your earnings could also grow by a lot depending on how well you manage the business. With time, your business could grow and even be listed on the stock market. While there are risks, if you pick a find, which you are knowledgeable and passionate about, it will increase your chances of success.
A Real Estate Loan is Good Debt
Buying a home is a good investment. With time, the home’s value could grow in value and you could sell it for a profit. You can also invest in commercial real estate by taking a loan. With time, the loan could be paid off and you could become debt-free. Right now, the real estate industry is doing quite well. Financial institutions will lend you the money you need if you can provide a solid plan.
An Example of Bad Debt
One good example of bad debt is a payday loan. In this type of loan, you will write a personal check to the lender plus a fee. This money is reclaimed on the next payday. As a result, you might end up having to ask for a new payday loan once your paycheck arrives. Instead, consider cutting back on your expenses and waiting until the next paycheck arrives. The interest for a payday loan can be as high as 300 percent.
Consider a Private-Pension
A state pension will only be accessible to you once you are 65 years of age. However, this pension may not always be sufficient to help you in your old age. Instead, consider a private pension that reflects your life. This flexibility can help you retire in peace. Besides that, you can use the funds from your pension to pay off some of the bad debt you may have incurred in life.
It is quite clear debt is necessary in some cases. Whenever you want to take a loan, always ask yourself if it is necessary and if it will add value to your life later.