Most of us have life goals. Becoming completely debt-free may rank on top of that list. No one really wants to be burdened with student loans and mortgages later on in life. Some of us may take extreme measures to get rid of debt. But is it all worth it?
The common mantra among financial advisors is to get rid of debt. The problem is, the average earner doesn’t make enough income to pay off debt in a timely manner. Take student loan debt, for example. These debts come with standard payment plans that kick into effect soon as the debtor graduates from college. However, the majority of new graduates don’t earn nearly enough to meet monthly minimal payments. This only results in the debt growing larger because of late payments and ever-compounding interest.
Recent graduates who are nose deep in student loan debt may forgo essential life purchases such as vehicles and homes in order to completely pay off expensive student loans. In such a situation, it’s truly worthwhile to consider whether rushing to eliminate a particular debt is sensible in the long-term.
It all boils down to distinguishing between good debt and bad debt.
Loans Worth Borrowing
Consider the predicament most recent graduates face with hefty student loans. These millennials will be indebted even before they have careers. And yet, does this mean that young people should forgo going to college just to be debt-free?
Certainly not. Data strongly indicates that a person’s ability to earn increases with higher education qualifications. Not going to college because of fear of debt would seriously undermine a young person’s future earning potential. Therefore, taking on debt such as student loans are not necessarily bad. It’s a case of balancing immediate financial freedom against future financial security.
The same goes for mortgages. If you want to start a family and settle down, a mortgage is not something that can be avoided. Avoiding a mortgage may mean renting for the rest of your life and never becoming a homeowner. Therefore, being in debt for two or three decades in return for buying your own home is not a bad bargain in retrospect.
The bottom line is, there are some debts that can offer enormous benefits, such as those relating to education or buying a home, that improves the overall quality of a person’s life. In this light, being in debt is not a bad thing.
Type of Debt Regular Income Earners Should Avoid
Not all debt is equally beneficial, of course. Consumers typically go into debt not necessarily because of useful loans, but because of unnecessary loans. The most prominent examples of such debts are credit card debt and short-term loans such as payday loans.
When taking on any type of debt, consider it’s true value in your life. If you borrow money to own a car, you may be able to drive to a better paying job located far away. But if you borrow money to modify that vehicle, you are just taking on an unnecessary amount of debt that will negatively reflect on overall finances.
Balancing Debt and Long-Term Financial Goals
An important question you should ask yourself is how debt weighs on your long-term financial goals. Good debt can offer positive benefits in the future, such as a home or a great career. But bad debt will only eat away at your monthly budget and threaten your retirement plans.
Instead of aiming to avoid debt, aim to avoid all bad debts. Have a financial plan and a budget to avoid scenarios that make you borrow unwisely. For example, if you save money in an emergency fund, it would prevent having to borrow high-interest short-term loans for things like medical bills or accident repairs. Limit the number of credit cards you use down to one. And always look for alternatives to having to borrow small amounts of money.
Control your impulse spending habits and instead focus on saving and investing your money. Then you will be able to pay down bills on useful debts like mortgages and be debt-free by the time you retire.