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Is Debt Always A Bad Thing?

Is Debt Always A Bad Thing? - celebrating financial freedom image

Could debt actually improve your life? Image licensed under Creative Commons.

Is debt always a bad thing? Many of us automatically assume debt is a hugely negative state of affairs, and while it’s true that unmanageable debt is frightening, it may surprise you to learn that some debt is actually positive. Often treated as a dirty word, most of us can’t avoid having some form of debt, while some try to actively avoid it.

And yet not all debt is created equal. There are some positive forms that could help you reach your goals quickly. You just have to know how to use it. Here’s how the right kind of debt can get you ahead of the financial game…

Debt Can Help You Make Money

It may sound hard to believe, but the right kind of debt really can help you to make money. The key is not to go into debt for consumer items you couldn’t otherwise afford, like that designer bag or new iPhone. Instead, use debt as a powerful tool to help you reach your life goals. Invest in an asset – like a house or apartment or even for something like doing an MBA and you’ll be channelling money into something that will pay you back. If you’re clever about the property you buy – selecting an up and coming area, negotiating a good purchase price armed with data from sites like MousePrice– then the value will rise over time. When you’re ready to sell, you will have accumulated a profit, even with the mortgage balance to settle. If you go into debt knowing that you’ll get greater value out of it further down the line then it’s a positive investment.

It Can Be Cost Effective For Purchases

Interest rates are at historic lows right now, so if you want to do something like buying a car, it’s actually better to use credit to make the purchase than dipping into savings and investments. If you have money in tax free savings like ISAs or even stocks and bonds, it doesn’t make sense to cancel out the returns you get from them in order to make a purchase. Considering your overall financial picture, you’re better off using credit to pay – especially if you lose tax benefits by liquidating an asset.

You Can Fill In Cash Flow Gaps

For those who have a portfolio career, are self-employed or starting their own business or work in a job that is highly dependent on commission, life often involves a fluctuating income. When used responsibly, short-term loans can get you through time periods where cashflow is lean – provided you use the boom times to pay them off. This regular repayment schedule will also help to build a really good credit rating, as lenders can see a history of responsible borrowing. You will then be offered better rates, reducing the overall cost of borrowing. This creates a virtuous circle of good credit that benefits your financial situation.

Debt doesn’t have to be an intimidating or shameful prospect- if you learn to use it responsibly, it can really be a force for good in your life.

 

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