We’ve been told that debt is a bad thing, but is beneficial debt actually possible?
Most of us have consistently been told that debt is a bad thing; in fact, some people say that debt is an emergency. In addition to this, we’re constantly offered countless ways to reduce our debt or consolidate debt for the benefit of our family finances— so the obvious conclusion is that debt is always bad.
Admittedly, debt is often every bit as bad as most people believe it to be. Few of us, given the option, would openly choose debt over being able to fund our lives or a particular project with cash. However, there’s no denying that debt is a fundamental part of life here in the UK. The figures on household borrowing speak for themselves.
Are these statistics a sign that we live in a country of broken people who don’t know how to manage their finances? Is debt always a crisis? Or, contrary to popular belief, can beneficial debt exist?
Debt can be beneficial, but there’s a lot of caveats
Debt for the sake of debt is never going to be beneficial. It’s definitely something that you should seek to eradicate if you have the funds to do so. Going into debt to pay for “nice things” or lifestyle extras that your wage doesn’t cover isn’t particularly justifiable.
However, that’s not to say that all debt is unjustifiable. There is an argument that debt can sometimes be outright good, and serve a legitimately beneficial purpose. The instances when debt could truly be seen to be beneficial include:
- If you go into debt to pay for an educational or vocational course that could increase your earning power in the future, then this is an example of beneficial debt.
- If you look for secured homeowner loans so you have the funds to improve or upgrade your home, then the value of your house will improve. Again, this means that the debt is actually beneficial to your future finances.
- If you take out a loan to cover a new business venture, this is an investment and you’ll make the money back in the future.
With both of the above scenarios, debt is a means to an end. It is a way of improving life and financial matters in the future. It is not debt for the sake of a fun shopping spree. Rather, it’s constructive debt, which will (hopefully) pay for itself over time.
When debt goes bad
Even within this limited application of debt, there are ways and means in which things can go wrong. You could, for example, find yourself tempted to splash out on the very best features for your home improvement project, rather than just focusing on changes that will genuinely add value to your home. A rise in your house price and potential future profits shouldn’t be seen as an excuse to choose opulent design and renovations!
The same applies to education. You should only undertake courses that are genuinely beneficial to you and your future career prospects. Trying something because you “like the sound of it” or think it would make a fun hobby is not beneficial debt. Instead, you should consider funding these things from your own leisure budget.
Hopefully the above has helped to clarify the fact that debt can indeed be beneficial— but only in the right circumstances!