Why debt isn't always a bad thing

There has been a lot of talk in recent years about the problem of people having too much debt. While this is a real concern it is also important to keep in mind that not all debt is bad, there are times when it is actually a good idea to borrow money. The key is to make sure that you know the difference between good debt and bad debt so that you can make sure that you are using it in the proper way.

The reason that debt is not always a bad thing is that used correctly it can be an excellent way to increase your net worth. This is what is known as leverage, you are borrowing money in order to make an investment so that you can get a bigger return. The most common situation in which most people will use debt to increase their net worth is when they buy a house. Almost everybody borrows money to buy their house which will then hopefully increase in value and help your savings to grow.

There are lots of other examples of using debt to increase your wealth; people borrow money to invest all the time, particularly into their retirement funds. It is actually a very good idea to borrow money in order to make sure that you contribute the maximum that you are allowed to your retirement savings plans. People also borrow money all the time to start a business; in fact virtually all businesses need to borrow money at some point in order to grow. This is an example of using debt to make the business worth more which then makes the owners net worth grow.

It is not always necessary to actually use the money that you borrow in a way that will lead to a direct return for it to count as good debt. An example of this would be a student loan. This does not allow you to directly increase your net worth but it does allow you to increase your qualifications for a job which will lead to a larger pay check down the road. While the investment here is a little bit less direct than say a mortgage it is still generally considered to be good debt.

While there is certainly good debt you do still have to make sure that you use it wisely. It is not always a good investment to buy a house for example; you have to take steps to make sure that you are likely to get a good return on the money that you borrow. It is also important to make sure that you are not borrowing more than you can afford to. Just because it is good debt doesn't mean that you can't get into trouble with it. It really isn't a good investment if the bank ends up foreclosing on your house.