Lots of financial-help gurus make a point of advising clients to rid themselves of debt before they worry about investing, and that's generally a good idea. However, there are at least three kinds of good debt that can actually put you in a better financial position if you use them wisely.

Remember, just because you have the cash to pay for something doesn't mean you shouldn't borrow if the rates are right. For instance, if you have $100,000 in cash and want to buy a house that costs $100,000, you could put it all down and have no payments. However, if you can borrow $80,000 at 5% interest you'd be smarter to do so, put $20,000 down in cash, and invest the other $80,000 in a diversified stock portfolio that will probably earn more than 5% interest.

Buying a home: The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the less you'll pay in interest over time.

Although it may seem logical to plunk down every available dime to cut your interest payments, it's not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning.

A house is often a family's largest financial asset, but it's also a highly undiversified investment. It's foolish to have such a huge chunk of your net wealth tied up in a single investment, which is one reason why borrowing to buy a house makes good financial sense. Of course, there's a cost to diversifying that value: you pay interest on the loan. But home loans are cheap and tax-deductible for loans of less than $1 million, so the debt is pretty cheap.

Paying for college: When it comes to paying for your children's education, allowing your kids to take loans makes far more sense than liquidating or borrowing against your retirement fund. That's because your kids have plenty of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. What's more, a big 401(k) balance won't count against you if you apply for financial aid since retirement savings are not counted as available assets.

Like home loans, college loans come with low interest rates and the borrower often won't have ot make any payments till after graduation. Those are incredible terms that you just can't beat, so it's smarter to borrow for college and invest your assets in other areas with higher returns.

Financing a car: Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it off the lot. It also depends on how much cash you have on hand.

This one is more dubious, but since cars are big-ticket items that most people can't live without it's unreasonable to advise people not to buy them without borrowing. Of the three kinds of "good debt" car loans are the worst, so pay them off promptly (but while you're carrying a balance on your credit cards!).



Email blogmasterofnoneATgmailDOTcom for text link and key word rates.

Site Info