“My mother always told us never to borrow money for anything. She worked very hard and bought a small house for cash, and she never owed anyone. However, I’m finding it difficult to live debt-free in these times. Is all debt really bad, or are there any good reasons for borrowing money?”

In the olden days of Shakespeare, it may have been possible to declare “Neither a borrower nor a lender be,“ as he wrote in the play Hamlet. Even in your mother’s time it was probably also possible to acquire housing, transportation and an education without ever visiting a lending institution.

However, with today’s rising cost of living that hasn’t seen a matching increase in income, the average consumer is often left with little choice but to incur some form of debt.

But was your mother really right when she said ‘No debt’ is good? Or can debt actually be beneficial?

I remember my very first debt many years ago. I wanted to buy a TV, but had no money because I had just left school. Luckily for me, I had a credit union account that had been going for years, thanks to my mother’s foresight. In a short space of time, I had acquired a loan within shares and was able to purchase the TV. This gave me a great sense of accomplishment and independence.

Today in hindsight, borrowing to finance a consumer purchase would definitely not be considered as one of my smartest financial decisions. However, there are some debts that we could classify as ‘good‘ debts. The key is that the interest expense of a good debt should be justified by some possible monetary advantage in the future. Let’s look at some debt that could be considered beneficial.

Education

Although the best way to finance your education is by saving towards this goal, sometimes it’s necessary to incur debt to get ahead. Improving your education can usually be a ticket to increasing your income. University graduates generally earn more than high school leavers, and persons with specialized training can demand more than their counterparts who don’t.

Housing

Most people would never be able to achieve their home ownership dream without getting a mortgage. The benefit of borrowing to buy property is that is most cases, the appreciation in value will be greater than the interest paid on the mortgage. To reduce your interest payments, select the shortest repayment time that you can afford.

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Transportation

Borrowing to purchase a vehicle can be considered ‘good‘ if it makes you more productive. Downtime waiting on a public transportation, especially in Jamaica, can be costly and de-motivating. A vehicle can also be used to generate income, by using it for hire or to support a business activity.

Investment

Using Other People’s Money (OPM) is one of the rules of big business. There is an old saying that goes ‘Show me a millionaire and I’ll show you a heavy borrower.‘ The key to borrowing for investment purposes is to have a plan where the cost of the loan can be more than adequately covered by the returns on the investment.

However, even these ‘good’ debts can turn into ‘bad’ debts if some conditions are not applied.

Firstly, before getting into debt, you need to be aware of your current financial picture. Can you really afford the repayments, no matter how great the purpose of the loan is? Your budget can help you to decide if your cash flow is sufficient to pay for the debt. A standard rule of thumb is that your total debt costs should be less than one-third of your monthly gross income.

Secondly, you need to be consistent with your repayments. Student loan debt is one of the most often abused loans. Sometimes the school leaver doesn’t immediately get a job, and ignores the loan payments to their detriment. We have all seen the newspaper ads with the pictures of delinquent borrowers! Missing your loan payments can also lead to penalty charges that can drive up your debt.

Finally, don’t count on future income to meet your loan obligations. A young, single person who locks into a long term debt doesn’t know what changes the future will bring. Marriage, children, or caring for elderly parents, can bring additional expenses that weren’t originally considered. Even the increased cash flow that was projected might not materialize due to changes in the economy.

Before making the decision to borrow, always consider if there is a better way to achieve your goal. You might be surprised at the other creative options that you may come up with!

Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.

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Originally published in The Daily Observer, April 12, 2007

Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl