We’ve heard it said a million times, “debt is bad,” but, how many people can pay cash for their home, car, and/or child’s education? So, when does it make sense to borrow, and what debt should be avoided?
Buying a Home
Buying a home puts money toward something you will eventually own as opposed to renting. Plus, mortgage interest rates tend to be the lowest of all debt. When deciding how much home you can afford, make sure your monthly mortgage payment is under 25% of your income.
Financing a Car
Most people can’t pay cash for a car, but we all need reliable transportation. Make sure you are getting the best rate at the dealership. It’s best to get prequalified at your credit union before car shopping. When budgeting how much your payments should be, keep within 10% of your monthly income.
Paying for College
If you are planning on sending your child(ren) to college, it’s best to start saving as early as possible. You may be tempted to take money from your retirement rather than borrow the money, but this should be a last resort. Look into the many educational loan options available to you and your child.
What doesn’t make sense?
Paying for holiday gifts and/or vacations on a credit card and not paying it off afterwards creates bad debt. While these items might give you short-term happiness, the stress you feel when the bills come in is probably not worth it. Create a savings account specifically for holidays/vacations with a goal in mind and stick with your budget.
Funding your entertainment and every day eating out expenses with a credit card is not a wise financial decision. If you don’t have the money in your account to go out, then stay in. Again, the short-term happiness you get from the event is not usually worth the long-term high interest credit card debt.