Is Debt a Dirty Word?

Antonio Caldera Jr., CPA

Is Debt a Dirty Word?


The US debt crisis, student loan debt crisis, consumer debt crisis...Do you see a common theme? It’s no surprise that debt tends to have a negative connotation. It’s for good reason. Debt can be dangerous. It can be life consuming and a source of anxiety, stress, etc.  

What if I told you there was a good side to debt? Good debit does exist! Plenty of individuals and businesses use debt responsibly. Here are a few things to ask yourself before going into debt. 



What's the purpose of this debt? 


This is probably the first and most important question to ask before going into any debt. Just because you can, doesn’t mean you should. What are you buying and is it worth buying? Here are some good reasons to consider going into debt (in all these situations, there are a lot of specifics that must be considered): 


  • Starting a business, expanding a business, or buying a business
  • Financing an “in demand” education (not always college, plenty of trades in high demand!)
  • Purchasing real estate
  • Purchasing appreciating assets



How expensive is this debt? 


This is a good next step when considering going into debt. How much is borrowing this money going to cost me? What are the fees? What is the interest rate? The cost of the debt could turn a good investment into a bad one. Do the math, or have a trusted advisor do the math. Does the return on your investment justify the cost of the loan? 



What's your plan for repaying it? 

 

Easy right? Just make the monthly payment! Kind of…  When going into debt, consider a plan if things don’t go as anticipated. No one anticipates losing a job, losing a loved one who contributes to the household income, or a slowdown in business. How will you pay if things don’t go as planned? Do you have a good life insurance policy? Do you have a backup plan for replacing income?  


All in all, managing debt can be complicated and every situation is unique. Start with a process like this and talk with your advisors. Debit can be good if you stay on the right side!