4 Times When It’s OK to Go Into Debt — And How to Avoid Too Much

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Debt is typically considered a four-letter word when it comes to personal finance. 

But there are moments when going into debt can be a good idea.

How?

It depends on a few factors, including the interest rate you’re paying on the debt.

If you have a debt that you’re paying 5% interest on, many financial experts advise that you could earn more by investing the money rather than use it to pay off the debt. Note: You should still make your regular payments — we’re talking about the additional money you’d use to pay off a debt faster.

And yes, there are plenty of life events for which you should not go into debt, but there are good reasons to go into debt — and ways to keep from going too far. Here’s what you need to know.

4 Life Events It’s OK to Go Into Debt For

Here are four life events when debt might not only be necessary but a good thing.

1. When You Take Out a Mortgage

If you have a quarter of a million dollars in cash hiding under your couch cushions, by all means pay for a house in cash. (Also, your couch must be incredibly uncomfortable.)

If you don’t have that kind of spare money, you’re like most home buyers, who have to take out a loan to pay for the bulk of their purchase.

And as scary as a six-figure debt can be, repeat after me: Real estate is an investment.

Why does that matter? Because buying a house isn’t like paying for a vacation, furniture or even a car — it typically appreciates in value rather than depreciates. So over time, real estate will be worth more than what you paid for it (probably — all investments come with risks, you know).

Pro Tip

If you’re ready to buy a home but aren’t sure where to start, check out The Penny Hoarder Academy course Homebuying 101.

Additionally, the average 30-year fixed rate mortgage dropped to 3.45% as of Feb. 6, 2020. At that rate, you could potentially earn twice as much by putting additional money toward an investment vehicle like an IRA or 401(k) rather than paying down your mortgage.

A new home is a major investment, and that means any loan you take out for it is a major commitment as well. To avoid getting in over your head on a mortgage, you should figure out realistically how much house you can afford based on your budget, income and ownership costs. 

2. When You Start a Business

If you want to make money, you need to have money (said the rich person to the poor entrepreneur).

Starting your own business often requires upfront capital to get operations going. But if you don’t have a stash of cash to fund your venture, your business could fail before it has a chance to thrive.

And if you choose to empty your savings or use credit cards to fund your business, you could end up in more debt than if you took out a small business loan with a lower interest rate.

The U.S. Small Business Administration has a program to help business people get financing after they demonstrate success for a few years. Then, if your business fails to pay back the loan, the government will pay the lender.

If you’re still not sure about loans to start your business, consider using multiple funding sources — we have 11 ways to help you get small business financing.

FROM THE DEBT FORUM

3. When You Enroll in College

Ideally, you wouldn’t need loans at all to go to college. You and your parents would spend your childhood saving for college and supplementing that with scholarships, so you’d leave school debt-free. 

And maybe you’ll do that.

But remember that a college education is still a fairly solid investment in your future — the Federal Reserve noted the average rate of return for a bachelor’s degree in 2019 remained high at around 14% — a solid return if you consider direct federal student loans offered a fixed interest rate of less than 5%.

And if you’re coming up short and you have the skills and dedication to succeed, student loans don’t have to be evil. 

Pro Tip

Check out these five strategies for avoiding student loan debt before you get your diploma, no matter where you go to college or what your major is.

The key to avoid becoming a statistic — you know, like joining those holding $1.48 trillion in student loan debt — is to avoid unnecessary student loans.

You can start by being realistic about your options — the College Scorecard allows you to customize a search by potential debt compared to earnings based on their field of study and institution.

But also consider loans the last funding option for college — check out these eight ways to pay for your own education without student loans.

4. When You Need Medical Care

We have ways to save on medical costs and to figure out what to do if you can’t afford your medical bill. But in the end, this is your health.

If you don’t pay for medically necessary treatment because you can’t afford it now, you’ll likely end up paying more for a pricier treatment later — or worse.

And here’s the thing: Unlike your mortgage lender or credit card company, your doctor or hospital almost certainly doesn’t regularly report missed medical payments to the credit bureaus. That means that unless your medical debt becomes delinquent, it won’t affect your credit score.

During an emergency, it can be tough to make a financially savvy decision, but if at all possible, avoid these mistakes when it comes to dealing with medical debt:

  1. Paying your bill with a credit card (especially a medical credit card)

  2. Consolidating your medical bills

  3. Taking money from your retirement plan

If you can negotiate prices or ask about financial assistance programs instead, you’ll be able to recover from a medical debt more quickly and with less financial stress.

Just a friendly reminder that this article is not a free pass for going into debt. Anything you put on a credit card is going to result in an interest rate that will leave you paying for an impulse purchase long after you forgot why you absolutely had to have it.   

But if you utilize debt in a way that lets you grow your money in the long term, a dip into debt could really be worth the trouble. 

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.