5 Smart Ways to Use Debt to Improve Your Life
Shortly after meeting my husband, he tried to convince me that debt was a good thing. His student loans, after all, were not only funding his tuition but also many of our first dates.
Using something called the “income smoothing theory,” he argued that it was better to borrow now, when we had little money, so we could live better than we otherwise would, and then pay it back later, when we (hopefully) had steady incomes. (Of course, to us at the time, living well meant being able to buy cheap Thai food and beer.)
While his theory falls apart if it’s taken to extremes, for the most part it makes sense. Debt can be a very good thing, as long as you use it wisely. Here are five ways you can use debt to improve your life.
Take out Certain Kinds of Student Loans
Students loans are often referred to as “good” debt because they allow you to earn more money later. Plus, subsidies from the federal government often allow borrowers to lock in low interest rates. And it’s true, using student loans to get new skills that allow you to pursue the career you want can drastically improve your life.
In fact, research from the College Board shows that a college degree plays a huge rule in how much money you can expect to earn: The median income for college grads over age 25 is $55,700; for those with high school diplomas, it’s $33,800.
Just don’t use the “good debt” argument to fool yourself into pursuing a degree in a field you don’t really enjoy, or one with less-than-promising job prospects. Many unemployed MBA-holders are probably wishing they weren’t carrying $200,000 of so-called “good” debt right now.
Invest in Professional Expenses
Putting money into a new suit for your first day of work or a certification program that lets you get a promotion can also help you earn more money in the long run.
If you recently graduated and have no cash to buy your new work wardrobe, or any other essentials to your new career, then it’s okay to charge them on a low-interest rate credit card. Just make sure a big chunk of your first paycheck is dedicated to paying down the debt so it goes away quickly.
Take Advantage of Auto Loan Subsidies
Auto dealers often offer special subsidies on auto loans or other kinds of discounts when they’re trying to move certain models (especially older or less popular ones) off their lots. If you’re flexible on what you buy, consider shopping based on the subsidies available.
It could mean the difference between a five percent interest rate and a seven percent one, and if you need the car for work or your family, that could be a good investment.
Manipulate Credit Cards to your Advantage
Credit cards often come with some perks hard to find elsewhere: Automatic ID theft protection. Travel insurance. Zero percent financing for limited periods. Rewards points, even when you pay off your bill each month.
Many companies are now also offering free software that allows you to quickly analyze your spending from your online account. If you can pay off your balance each month, then you essentially get all those benefits for free (just make sure your card carries no annual fee).
Avoid the Dark Side
Overspending on credit cards means fees, high interest rates, and lots of financial stress. The new credit card rules require card companies to feature more information on monthly statements, including how long it would take to pay off the debt if you make only minimum payments, or how much you have to pay to unload the debt in three years.
Paying attention to those numbers – and to any changes to your card policy that arrives in the mail – can help you avoid falling into a debt trap.