Credit and debt are financial tools that when used well, can help you succeed financially. It helps to know the difference between good debt vs bad debt.
Not All Loans Are Created Equal
A few years ago, I decided to earn my master’s degree in education. My first step was to go to this government’s site on financial help for education.
I filled out the application after learning that my university would charge me $15,000 for the whole process online, not including books of course. The school was paid directly by the Department of Education during the two years it took me to complete the master’s degree. Check this out for detailed information regarding federal education loans.
Where my student loans worth it?
Are you kidding? My school immediately increased my salary as a teacher by $3,000 annually. So even without any other help, I would have paid back the loan in 5 years. I had, however, a ‘hidden’ ace which was something I took on and which I wholeheartedly recommend to prospective teachers: teach in officially declared poor areas of the country. My loan was thus ‘forgiven’ (i.e. paid by the government) — a clear case of ‘your taxes at work’.
Good Debt: Student Loans
Student loans are typically recognized as good debt. But please remember that with educational costs — you get the most bang for your buck when you consider a couple of conditions:
- You are certain that you’ll work in your field of study.
- Your future salary will be sufficient to PAY for education loans you take. Unfortunately, few college bound students plan ahead that far.
Once you graduate, live off your wonderful and caring parents whenever possible and minimize your expenses. After a couple of years they will, quite likely…and very politely, ask you to move out. They need their privacy after all and your loud parties on Saturday night (or the extra laundry) may begin to exhaust their patience. But, by then, you’ll have repaid a big chunk of your loan if you’ve acted smart by not overspending.
Good Debt: Buying A Home
I recently met with a young couple living in an apartment. Both of them were paying off students’ loans, both were working with decent salaries (about $50,000 each with no children, one beautiful dog), and both were anxious to buy a home. They sat down, made a budget, and decided that, yes, they had the means to pay a mortgage on a ‘used’ house.
Investing in a house is always a good move; in the long, long, run, say between 10 to 20 years, its value will increase. Forget about the present housing slump; it’s part of the market’s vagaries. It’s also a wonderful opportunity to buy cheap. Just make sure that you want to live in that area for a long time.
One caveat: we’ve learned our lessons with the current housing bust, so do avoid those risky mortgage loans; the more creative ones can be the most troublesome.
Good Debt: Start A Business But Watch The Risk
So you want to start your own business; if you are not Bill Gates, be careful. For some in-depth insight and additional tips, take a look at About.com’s article series on taking on business debt. When it comes to getting into business for yourself, you’ll want to pursue good, workable ideas, and to be well-prepared; also keep in mind that more than 80% of new small businesses fail within 2 years.
The ‘Baddest’ Debt of All: Spending On Random Stuff
When I got my first paycheck as a single man, I was giddy with excitement. My money, finally! I wanted to spend the whole thing on crazy stuff (The whole $300). I felt rich, I felt proud. I didn’t realize that I was also being reckless. Incurring debt when you are fresh out of college may just be the most foolish thing you can do. Sure, we’d all like to look cool with designer sunglasses, shoes and clothing. We want the elegant sofa we saw at Macy’s. But let’s think this through a moment. To gain financial success, you’ll need to learn to live within your means. If you’re still juggling student loan programs and working on fulfilling your student debt obligations, you’ll need an even tighter rein on your budget. But be encouraged with the thought that once you’ve handled those loans, maybe then you can think about splurging…! Well, maybe just a little. 🙂