Debt is not a bad thing. In fact, when used wisely, it allows us to pay for things that we would not be able to afford if we had to pay for them all at once.
However, too many times we get into debt in order to buy things that don’t fall into that category. For example, we use credit cards to charge clothing, vacations and even dinners, which can leave us paying interest on a meal that we’ve eaten and forgotten months ago!
When we have too much debt, our credit suffers, which could hinder our ability to take out a mortgage or get a low interest rate on a car loan. Whether you’re tempted to take out a loan or whip out a charge card, ask yourself these questions before signing on the dotted line.
Do I need this item right now? When you charge something or take out a loan to pay for it you pay extra for the convenience of having it NOW. But if you’re not going to use it right away, you’re paying for a convenience you don’t need. If the purchase can wait, save up for it so that you can buy it outright.
Is this item going to increase in value? All debt isn’t the same. Some things that we go into debt for will actually help us to build wealth over time, such as a house that goes up in value or an education that helps us to make more money. When determining whether it makes sense to go into debt, ask yourself if there is a clear financial benefit for doing so.
What will I need to give up in order to make the payments? If you take out a loan, you have to pay it back. Consider what the payments will do to your budget. If they’ll eat into your savings or leave you unable to pay all of your monthly bills, taking on the debt will be a bad move.
How long will it take to pay this debt off? If it’s going to take you years to pay off a debt, you have to make sure it’s worth it. For items that increase in value, such as a house or an education, it makes sense to take out a long-term loan. But if you take out a long-term loan for some new furniture or something that you’ll likely lose interest in before you finish paying it off, you should re-think the wisdom of such a decision.
If it’s not a need, doesn’t increase in value and you can’t pay it off in a couple of months, it’s probably a debt you can do without.