Debt isn’t really good or bad. It’s just DEBT.
It’s a tool you can use in place of cash. However, the way you use it can lead to good or bad outcomes. For example, I often hear people talk about good debt as debt used to purchase a home or pay for an education. But if you ask people with homes underwater or graduates still looking for jobs or underemployed and saddled with huge loans, I’m not sure they would agree with that assessment. And, I also hear people talk about bad debt as debt used to buy a car or credit card purchases. However, if you need a car to get to work to make money OR if you can use a low interest rate credit card instead of cash and keep your money invested at a comparable rate, would you really consider that bad debt? I guess what I am trying to say is that debt is a complex subject and there are no pat answers. So before going into debt, even for small purchases, it’s a good idea to carefully evaluate your situation and determine if the benefit you receive will be greater than the cost you will have to pay.
The problem is we often don’t take the time to do the analysis before going into debt and that can lead to bad outcomes. One of the best ways to determine if debt will most likely have a good outcome in your situation is to stop and ask yourself three basic questions before you take the leap then you will have a basis for making an informed decision:
- What is the true cost? Gather all the facts, including doing your homework to uncover hidden costs and reading the fine print before you commit. For example, if you are purchasing a house, the cost of the house is not the only cost – there are also insurance payments, taxes, maintenance, possibly higher utilities, additional furniture purchases, etc. to consider, plus the INTEREST.
- What is the best case scenario? What benefits will you receive? How will your life be different? How will this impact your financial future?
- What is the worst case scenario? If things don’t work out as you planned, will you still be okay? Will you still have adequate funds to pay your debts? How will a bad outcome affect your overall credit score and your financial future?