Posted by KLSM CPA Firm PLLC

Situations When Going into Debt is Advisable

Situations When Going into Debt is Advisable

Debt is not necessarily bad as it can either cause harm or help someone, depending on how it is used. This is not about going into high-interest debt but considering and leveraging other forms of debt to make money. A mortgage, for instance, will buy a property, and the value will increase over time while a student debt will earn a degree that can help one into good-paying positions. 

We understand that situation of every family is peculiar, but here are five times when it makes sense to consider going into debt:


Higher Education: 

With a college degree, you boost your chances of getting a job. Since the 90s, there has been a steady decrease in good jobs for people with high school leaving certificates. However, jobs for people with college degree training have increased. Also, jobs for people with a college degree have skyrocketed over the years.

Typical college education is getting costly every year. Even though there are scholarships, grants and work-study programs, many students might be opportune for this. This makes student loans a good option as such a degree should lead to a job with a high income to justify the debt.

 

Housing: 

Another common debt type is mortgages. Only a handful of people are buoyant enough to pay for a home in cash. 

Undoubtedly, there is a risk with mortgages, as the housing market crash is a reminder. Loans with variable interest might not be affordable if rates skyrocket. As a result, one needs to avoid taking loans with the combination of principal, interest, and insurance costs exceeding 28% of the gross income. 

An affordable property with a fixed-rate mortgage is a clever use of debt for a property that has increased in time. Also, such interest and deductions might be written off from federal tax forms by those that itemize their deduction.

 

Investment: 

It is not uncommon for people to borrow money to invest in stock. This investment strategy might work if the present bill market, alongside the low-interest climate, didn’t change. However, it comes with a high-risk level, especially when the market spirals down with no warning. 

Buying rental property is a better way to invest using your debt. It makes sense to get professional guidance and avoid excessive debt. It is mainly advisable to consider an investment with the confidence that they will earn more than interest charges and other fees.

 

Business

Starting a business or buying one is also another investment that might need debt. You will need capital for various things like assets and salaries; as a result, without credit, a business might not grow. 

However, one needs to know the effect of the debt on the overall goal. In other words, knowing the type of income that the debt can help yield is vital. Make sure to have a business plan and repayment strategy before you take out such a loan.


Transportation

Vehicles generally do not appreciate, so not everyone agrees that going into debt makes sense to acquire an automobile. In some cases, however, debt makes sense, especially early in life. 

Reliable transportation is essential to keep your job, even though not everyone can afford cash for an automobile. As a result, a loan for an affordable car might not be a bad idea. A good strategy is to pay 20% as a down payment and complete the rest within four years.  Also, payment for the car alongside its insurance premium should not be more than 10% of the person’s gross income.

 

Conclusion 

While debt makes sense in some situations, people should avoid debt, especially in their golden years. Having a debt burden makes no sense when retired. However, before entering retirement, debt can be an excellent tool to further your family's finances. 


FOR MORE INFORMATION ON HOW KLSM, CPA FIRM, PLLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


THANKS FOR VISITING.

KLSM CPA Firm PLLC
Contact Member