Debt is a huge drain on many Americans. In fact, one recent survey found that only 20 percent of Americans have no debt at all. The other 80 percent may feel as if they slog away with a never-ending cycle of bills. But, believe it or not, not all debt is bad. Some forms of debt can be classified as “good debt” -- or debt that provides us with advantages -- as long as we don’t abuse it.
1. Debt allows us to get an education: A college education gives us a leg up. And, without student loans, a degree would be unattainable for most of us. But you don’t need to go to the most expensive university to get that solid education.
Instead, take a hard look at the financial aid offers and total costs at each of the schools that you’re considering. Don’t discount the state college down the street, where the average tuition is about $9,500 per year compared to $32,000 for the average four-year private school. You’ll also need to keep in mind how much money you’ll earn once you graduate from college.
FinAid recommends that student loan payments equal no more than 10 percent to 15 percent of your expected income. The website offers a calculator where students can select their field of study and determine how much debt they’ll be able to comfortably afford once they’re working.
2. Debt gives us a roof over our heads: Home mortgages have allowed many of us to check off this big ticket item from the American Dream wishlist. But, just because a loan officer has approved you for a $300,000 house doesn’t mean you should buy a $300,000 house.
Monthly house payments should generally be no more than 28 percent of your income before taxes. And, it’s always best to spend less than you can afford so you have more money to pay off other debt, save for retirement or take that dream vacation. When shopping for a house, look for a home you love, but in a price range that’s far less than the most that you can afford.
3. Debt gets us around: For many in the United States, especially in areas with no public transit, owning a vehicle is a must. But, for most of us, paying cash for a car is out of reach. The average price of a new car is about $33,500, according to the Kelley Blue Book. It’s $16,800 for a used one, according to Edmonds.com. Thankfully, we have car loans. Still, it’s important to keep the amount you borrow low. A general rule of thumb: Your car payment should be no more than 15 percent of your take home pay. And it’s always better if it’s less.
4. Debt helps us in emergencies: Imagine your house full of guests for Thanksgiving and your furnace shuts down. Thanks to credit cards, you can easily pay for a replacement. And, that’s just fine, as long as you’ve built up a solid emergency fund. With an emergency fund, you’ll have more than enough money to completely pay off that credit card bill when it comes due.
Debt isn’t always bad. And it definitely doesn’t have to be a drag as long as you borrow only what you can afford -- and pay it off as quickly as you can. Some debt can be useful and can assist you in building a strong credit profile. The key is knowing the right kind and amount of debt you can manage responsibiliy so you can be in control of your debt instead of your debt controlling you.
Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
CESI is NOT A LOAN COMPANY