Posted: 9:18 a.m. Wednesday, Feb. 20, 2013
If we never had to borrow money, life would be much easier. Having cash on hand to pay for a house, a car or a college education would save us hundreds of thousands of dollars in principal and interest — not to mention the money we could earn from investing that cash.
But that’s unrealistic. We all need to borrow money at some point. So it’s important to make a distinction between “good” and “bad” debt.
Most purchases made with a credit card are “bad” debt. Buying clothes, food at restaurants and other non-essential expenses and putting those changes on a credit card is dangerous. You are paying interest on these purchases and it’s easy for these charges to quickly run into the thousands of dollars. There are exceptions; we all need a credit card to pay for airline flights or hotels rooms, but I advise you to quickly pay off these charges.
However, borrowing money to buy an asset that appreciates in value is “good” debt. The best example is borrowing money to pay for a home. Few of us have the funds available to buy our first home. In addition to providing shelter, homes have historically appreciated in value.
If you can even shorten the length of your mortgage loan — taking a 15-year loan instead of a 30-year loan if you plan to stay in the home for a long period — you will benefit even more. You will own the home after 15 years and reduce your interest payments by tens of thousands of dollars.
I know that many people who purchased a home between 2005 and 2010 have lost a lot of value in their investments. They aren’t worried about making money on their purchase; they are simply trying not to lose more money.
But if you enjoy living in the home and in your community, I think you’ve made a good investment. If you are in a good school district and maintain your home so that it will keep its value, don’t worry about being “under water;” eventually, the economy will recover.
If you like your home, stay there. Ultimately, you will pay off the debt.
Let’s talk about one more example: borrowing money to pay for a college education. While a college degree provides a return on investment, especially if there is a lucrative salary waiting for you after graduation, I strongly advise people to be cautious about borrowing money to pay for college.
The travails of student loan debt are well known.
Many people graduate and either can’t find a job, or find jobs that simply don’t pay enough money. Because the return on this investment is difficult to judge, I advise students to exhaust all other options before borrowing money.
There are plenty of ways to avoid borrowing.
Consider a community college for your first year to reduce costs. And don’t choose a major and make a career choice until you are certain it is the one for you.
Do your best to obtain an internship — even if it’s unpaid — and work in a real-world environment. Otherwise, changing majors and staying in school longer only means more costs.
Look into work-study programs and consider working at least part-time while going to school to cover your costs. And, of course, try to qualify for a Pell Grant and other grants and scholarships.