When is it worth going into debt, and when is it better to save until you can purchase outright? It’s a personal question for many, but there are some investments and opportunities worth buying now and paying for over time.
Whenever possible, you do not want to take on too much and then have to climb out of debt, especially when you factor in all the added interest to the true cost of the purchase. If you’re not sure if you should get a loan or use a credit card, consider a few tips and strategies for making better decisions.
Here are some instances when it’s worth it to go into debt.
Buying a home
Most people purchase a home with a mortgage simply because they have to do so. If you wait to save up the price of the home, you may never buy one. A mortgage is usually a relatively low cost debt to have: structured as a long-term debt, mortgage rates tend to be much lower than interest rates on credit card debt, for example. And chances are your monthly mortgage payment is less than comparable rentals in the area.
Buying a house is one of the most common and often beneficial times to go into debt. Over the long term, home values tend to increase, which would increase your equity in the property and thus your wealth.
There are exceptions, so do your homework and research the economics of the area you are buying in, but if it looks like your home value won’t decrease and If you can afford the downpayment and then the monthly expenses of insurance, taxes, and utilities, it may be worth going into debt to buy a home.
Paying for college for yourself
For so many professions, you ultimately need college, and it’s usually pretty expensive. If you wait until you can “afford” it, you might never go, which would ultimately constrain your earning potential and your wealth.
There are lots of ways to reduce the amount you have to borrow, such as work-study programs, grants, and scholarships. In some cases, your debt may be forgiven later, usually depending on the field of work you pursue. However, don’t go to college just to go; choose a career path to make the most out of the investment.
Buying residential property for rentals
Do you want to own real estate to rent out? In some markets, this can be a great way to create a steady stream of income. If there’s demand for rental property in the area, and you qualify for a low-interest mortgage loan, it can be worth it to go into debt for this passive income investment strategy.
Just do the math first. Be sure you know exactly what the market conditions warrant and what you need to charge to turn a profit. And remember that not all “passive” income is really so passive; you will need to manage and maintain the property, even if you hire others to do so.
Buying a car
Sometimes, it’s worth it to go into debt to buy a new car. The conventional wisdom used to be that it never made sense to buy a new car, given its faster rate of depreciation. But cars are more complicated and more costly to repair, and a new car may save you a lot while it’s under warranty.
These days, most dealers will take your trade in and then just roll over and extend your existing loan to help you purchase the next car. Of course, if you do find a used vehicle that fits your needs and can finance it with a low-interest loan, it can be well worth the purchase.
Pro-tip: You don't have to go into debt buying car insurance, though, since there are plenty of easy ways to save on car insurance.
Going to grad school
As you work to build your career, you may realize there’s a need to go back to school to get a graduate degree or advanced certification.
A grad school degree may be critical for those who want to work at certain positions or who need the most cutting-edge education possible. If you need more education and/or training to maintain your license to work, get a better paying job, or just go further faster, a student loan may be necessary and worthwhile to take this step.
Your ability to earn money over time to pay for your financial needs and to build wealth is critical, and there are many career paths that are drying up or changing.
If the current position you are in no longer fits your goals, and you want to go to a trade school or take courses to prepare you for a field that may be more in demand — and where you can enjoy more earning power — then going into debt may be worthwhile. Look for low-cost programs and try to steer clear of any scams.
Using credit as a tool may enable you to build a stronger credit profile, which could make it more affordable to buy a home or a car later.
Not all debt has to be super expensive, and it can be useful in small amounts. It may be worth it to open a credit card account and keep charges low to help you establish your credit history over time. Just be careful to pay it off every month and not to go over your credit limit.
Buying a second home
This one may be worthwhile depending on how far off retirement may be. For example, let’s say you want to buy a second home that you plan to use as a seasonal or vacation home, for now, and ultimately retire to. That could be a smart move in some cases.
First, be sure you qualify for a low-cost loan. Then, find ways to create earnings from that investment, such as renting it out during the off-season when you’re not there. Using rental income to pay off your second home and grow your wealth can be a nice benefit when you enter retirement later.
Booking a vacation
With some focus on moderation, going into debt to go on a trip could be worthwhile. Everyone needs to take a break, see the world, and reconnect with loved ones. If you’re burning out and need a break, though, don’t use so much debt that you’ll end up stressing out about it later.
Instead, find ways to travel for less, such as using travel credit cards that accumulate “points” that you can cash in for hotel stays or airfare. That way, you are putting less on credit as you travel, and that in itself can be rewarding.
Paying off existing debt
Another time it may be well worth it to go into more debt is to pay off existing debt. Here’s what we mean. If you can find a loan that has a lower interest rate than your existing debt, use it to consolidate and refinance that existing debt.
That way, you end up spending less money in the long run by switching out high interest rates for lower ones. The key here is not to continue to spend and overextend yourself.
Buying new furniture
Is it worth it to open a credit card account to buy furniture? That depends on what you’re buying and your needs. Items that are long-term purchases, those that will last for years, are well worth the investment if you can get a low-interest loan to do so. Unless you have the money saved up, you’ll need to replace that worn mattress or couch somehow.
Starting a business
There’s certainly risk in starting a new business, but if you do it well with a low-cost loan, for example, from the Small Business Administration (SBA), chances are good your costs will be much lower.
Do the research first (that’s certainly worth putting some time into before you dive into a loan) and create a business plan. Know the competition, get the financials in order, and then invest slowly to avoid a big, costly mistake.
Making a move across the country
A big move may be a huge expense, and using credit may be the only way you can afford to make it happen. Most of the time, when the goals of the move are sound, for example, moving closer to family into an economically strong area, it is well worth it. The debt you use for a move, however, should be as small and as cheap as possible.
Buying more technology
Your laptop isn’t working properly. You are struggling with a phone that’s broken but will cost a lot of money to repair. In these situations, when you need the technology, going into debt to buy them is worthwhile.
But be sure to do your homework. Don’t for a brand name or for status, and buy for how the tech fits your needs; look for the cost that makes it affordable. A bigger screen TV isn’t a viable choice when the one you have is really just fine.
Starting a family
If you tried to wait to save up enough money to start a family, it may be impossible to do so. Whether you hope to conceive naturally, use IVF, or adopt, starting a family is expensive but nearly always worth it. Make sure you’re adding that new life to your monthly budget too so you don’t have to continue to rely on debt to cover the costs.
In every situation, it’s almost always best to save up for a purchase and avoid going into debt, which always creates a cost.
Realistically, though, that’s not going to be possible, and actually, it’s not always optimal. If you seek out the most affordable loan for your purchase and then work to pay it off consistently over time, going into debt can be well worth it and might even help you get ahead financially in the long run.