The Sensible Way To Go Into Debt
When we talk about debt, we’re often discussing getting out of it, not going into it. But debt is a critical vehicle in our society. It is what gives people the productive resources that they need right now to construct a better future for themselves tomorrow.
Imagine for a second what the world would be like if there were no debt. People wouldn’t be able to start businesses. Opportunities would go unrealized. Homeownership rates would plummet. And people would struggle to buy the cars they need for work. Everyone would be on a bicycle.
You’ll probably agree that that isn’t a world in which we want to live. Being credit-starved is just as bad as being saturated by the stuff. It’s a delicate balance we need.
So what’s the sensible way to go into debt? How do you work out whether you’re making the right decision with your finances or not?
Understanding What Debt Is
The first step is to gain an understanding of what debt is. Or, more specifically, how you should use it.
Yes, debt is cash right now. But it is also a tax on your future prosperity. The more debt you take on today, the more consumption you have to give up tomorrow.
Debt, therefore, needs to be worth it to your future self. You want to use it in such a way that the person you are ten years from now actually appreciates what you did. It has to make sense. So when does going into debt make sense?
For the most part, it is all to do with the stuff that you need today to make a wealthier life for yourself in the future. That’s what makes the interest rate worth paying.
As Direct Car Credit points out, there are numerous advantages from choosing to go into debt to buy a vehicle. For instance, you might have a job right now that pays £20,000 which you can get to on foot, but there might be a role that pays £40,000 that requires a car. Clearly, it’s worth taking the better-paid option if you can. And, if that means going into debt, so be it.
Debt, therefore, in this scenario, is using cash in a way that helps you make more money. The same could be said of getting finance to launch a business or even to buy a house. You pay interest, but you get back more through your hard work and dedication. Well, that’s the theory anyway.
The Importance Of Debt-To-Income Ratio
Of course, there is such a thing as too much debt. If you can’t service the interest payments out of your regular income, then you’ll find yourself in a lot of bother.
A good debt to income ratio is typically around 25 per cent. In other words, your debts are around a quarter of your total annual earnings. Any higher than this and most people find that they eventually struggle to make payments, and it negatively affects their credit score.