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Question:


Should debt be used as a tool or should you avoid it like the plague?
-BirminghamCal


Answer:


Debt definitely has its place. If people waited until they had enough saved up to buy a home with cash, nearly everyone would be renting. Of course, if landlords did the same, who would own the dwellings for all those renters? Debt also may be unavoidable for other necessary or otherwise important purchases like a college education or an acute or chronic health ailment not fully covered by insurance (if you can’t avoid the plague, for instance).
 
When you’ve got some choice in the matter, it’s usually wise to get by without taking on debt, but not always. Borrowing may be the right thing to do if the money raised is put to work in some productive way that provides a greater return than the cost of borrowing. This is what businesses do all the time, and they couldn’t grow if they didn’t. Borrowing at one rate and investing the proceeds in an asset that earns a higher rate of return is sensible, as long as you’re very confident of the assumptions you make about the costs and returns involved.
 

The concept also works when the benefits are less tangible. Say you’ve got a job interview coming up and you use a credit card to buy a spiffy suit. The returns for the long run could be immense, if hard to quantify. On a larger scale, taking out a loan to buy a car that will allow you to take a more lucrative job in another neighborhood or to live in a more economical town might make sense too. On the other hand, using plastic to finance a night of partying would be imprudent.

-Conrad de Aenlle



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