What’s Worth Going Into Debt For — and What’s Not

Cropped shot of an affectionate young couple going through paperwork while doing their budget at home.
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Borrowing money can saddle you with years or decades of debt that prevents you from living your best life. At the same time, it can also open doors to investments, opportunities and financial leverage that you would otherwise never have.

Classifying debt as either “good” or “bad” is an oversimplification. The same type of debt can become a burden or pay long-term dividends depending on how you borrow, how much you borrow and why. That said, let’s take a look at forms of debt that are typically worth it, and those you should avoid.

For Most, Debt Is the Only Ticket to Homeownership

The best example of good debt is a mortgage that you can afford. Most people don’t have six figures to plunk down for a home, but real estate is still one of the cornerstones of middle-class security and generational wealth.

“Buying a house is worth going into debt for as long as you can afford to pay the mortgage and all the related costs of house ownership, including utilities, repairs and maintenance,” said Jacqueline Gilchrist, founder of Mom Money Map. “A house is a valuable asset. Depending on the market, a house can appreciate and become more valuable over time.”

Credit Card Debt Is the Bane of the American Consumer

The first time you don’t pay your statement balance in full, compound interest starts working against you — and compound interest is a powerful opponent. With the holidays approaching, most Americans will find that credit card debt is the kind of borrowing that’s most likely to get them into trouble — the kind of trouble that can take years to undo.

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“Credit card debt is considered bad debt because it’s used to finance purchases that don’t appreciate in value and may even depreciate,” said Lauren Davis, financial advisor and founder of the Moolah Project. “Additionally, credit cards typically charge high interest rates, which can make it difficult to pay off the balance.

The Right Kind of Business Startup Loan Can Be Good Debt

Starting a business costs a lot of money, and most entrepreneurs don’t have the capital to back up their aspirational spirit. So a business loan that fuels what turns out to be a profitable company can be a worthwhile debt to shoulder.

“I think it’s worth going into debt to start or grow your business,” said Sully Tyler, an entrepreneur who has started three companies. “I know it sounds like a risk, especially if you don’t really know whether it will be profitable or not, but by understanding exactly how much money you will need upfront and budgeting for future costs, you can minimize the risk of failure.”

Tyler added that startup loans should have negotiable interest rates, flexible repayment options and other safeguards in case your business fails.

Wedding Debt Is Bad for Financial Health — and Your Marriage

According to The Knot, the average wedding costs $28,000 — $34,000 if you count the ring. For most people, that means five-figure debt, which is a risky proposition considering how many divorces can be traced to money problems.

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“Starting off your married life with debt from your wedding gives you one more obstacle to overcome on your journey to married bliss,” said Colin Palfrey, chief marketing officer of Crediful. “Debt is one of the main causes of marriage breakdowns, so if you borrow to get married, you are well on the way to becoming another statistic. Scale down the ceremony if need be, invite fewer people, get a smaller ring. You can always upgrade later when you are more financially secure.”

Investing Can Justify Debt if You Get Returns To Back It Up

Bonnie Ling Thich, CEO and owner of Finsavvy Panda, believes the risky proposition of borrowing to invest can make sense for young people who can leverage time to grow their investments well beyond the size of the debt.

Alternatively, it can be wise to invest instead of paying off an existing debt under the right circumstances.

“For example, I delayed paying off my $38,000 in student loans in my early 20s to invest in the stock markets and real estate when interest rates were still low,” said Thich. “It was worth staying in debt because it allowed me to save my first $100,000 in net worth by my mid-20s. As I held onto those investments for almost a decade, I was able to generate a net worth of seven figures in my 30s.”

Avoid Borrowing To Buy Stuff You Don’t Need

So much toxic credit card debt can be traced to unnecessary consumer spending. Several experts told GOBankingRates to avoid charging more than you can afford to dine out, and don’t overspend on clothing or take vacations you can’t afford, However, in today’s tech-heavy world, gadgets might just be the main culprit of superfluous spending.

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“Nobody requires the most recent Apple accessory or a pair of Bose noise-canceling earphones,” said Jack Williams, founder of Handyman Reviewed. “You might believe that your new smartphone will help you stay organized or that your robot vacuum will free you up from cleaning as much, but before you’ve finished paying off your new device, the next big thing will most likely appear on store shelves.”

Student Debt Makes Sense if the Degree Pays You Back

Like homeownership, borrowing is the only path to higher education for many Americans, and it can be worthwhile debt — as long as you don’t borrow too much or for the wrong degree.

“Education and training are necessary to keep one relevant in the workforce,” said Andrew Griffith, CPA and associate professor of accounting at the LaPenta School of Business of Iona University. “If one has to go into debt to acquire this education and training, one should borrow only what is absolutely necessary to finance this education and training and then only pursue such programs that have a better than 50% chance of significantly increasing one’s annual income while aggressively paying off the debt from this education within five or fewer years. In other words, one should always evaluate their expected return on investment associated with the pursuit of a particular education program before enrolling in that program.”

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