When Going Into Debt Can Be a Good Thing

Going into debt is a valid financial tool if used properly

Generally, I do not carry any debt. But that does not mean that I do not have borrowing capability. I made it a point to bring my debt installment payments down to zero before I retired. But that does not mean I did not borrow regularly before. Or that I would not borrow again. Because in my view going into debt can be a very good thing. Here is why I think so.

Handling Financial Emergencies. I may have substantial cash reserves now, but that was not always possible for me. Available credit, mostly via credit cards, was what I had to cover unexpected large expenses. Car repairs, dental bills, and suddenly necessary travel are just some examples of situations I was able to handle because I could go into debt. My car got repaired. My teeth got fixed. My travel emergency got covered. My life moved forward. Going into debt made that possible.

Applying Financial Leverage. Practically every successful business in America uses debt to benefit from financial leverage. So do I. When my wife and I bought our first house, we did not pay cash for it. We applied financial leverage by purchasing it with a $10,000 down payment and a $100,000 mortgage. By going into debt, we got the house 5 years earlier than if we had waited to amass the cash. We got to live in the house. We got to have mortgage payments lower than rent would have been. The money that would have gone up in rental smoke instead went to pay the mortgage. And — here is the kicker — we made a big profit on our investment.

We sold that house 8 years later for $165,000. So the house had appreciated 50% in those 8 years. BUT the profit on our $10,000 initial investment was 500%! That is the power of financial leverage — made possible by going into debt.

Capturing Opportunities. Without being able to go into debt, I would have had to let many opportunities pass me by. Like buying a used but immaculate Thunderbird in 1980 that moved me around in style for the next 20 years. Like buying a foreclosed 100-acre farmstead in 2002 for 66% of its appraised value and selling it at full value a few years later. Going into debt, large and small, is what has allowed me to capitalize on these and many other opportunities.

Bottom Line. To me, going into debt for a good reason has been tremendously beneficial. I see no reason to be afraid of debt or to treat it as an enemy. On the contrary, properly used and managed debt has been my financial friend.

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image courtesy of Stuart Miles at FreeDigitalPhotos.net