Recently a lot of my younger clients have been asking if taking on debt can ever be a good decision. Of course, every situation is unique, and there isn't any one-size-fits-all solution, but in most cases there can be good debt and bad debt. It's almost impossible for any of us to live entirely debt-free, most of us can't pay for a home or vehicle with cash. However, it can be very easy to allow our debt to get out of control and it is too easy to spend more than you can afford when that plastic card is burning a hole in your pocket. Avoiding debt at all costs is not an ideal situation either if it means exhausting your short-term cash reserves.
Good debt includes anything that you can't afford to pay for up front without depleting your cash reserves or retirement assets. The leveraging power of a loan for buying a home or financing a vehicle may help put you in a better overall financial position. In these situations, carefully consider how much you can afford to make as a down payment and how much of a loan is feasible for you to carry.
Bad debt represents purchases that you either didn't need or cannot afford. Some examples of bad debt can be a trip to the Dominican or running up your credit card bill for the newest gadget. Credit card debt, in some cases, can be the worst kind of debt because they typically carry the highest rates of interest.
When faced with the decision of a big purchase, it can be very difficult determining whether it is good or bad debt. Making a big purchase impulsively can be a decision that affects you for a number of years into the future. Every situation is different, but it is important to step back and think about how much debt you can carry, comfortably, to avoid exhausting your emergency savings.
Ethan Wade, Financial Advisor
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).