One of the most important financial decisions you are likely to face is whether to go into debt. In some cases, debt may be difficult to avoid, while in others, debt maycan be used to obtain items that you want rather than need. Your short-term and long-term financial goals, as well as your own comfort level with debt, play a key role in determining if carrying debt is right for you.
Carrying debt is often a necessity when making important large purchases. Many people don't have the cash on hand to purchase a home or a reliable vehicle, and going into debt by taking out a loan is the only way to make these items affordable. In the case of a home, debt can help to finance an investment, allowing borrowers to possibly recoup some or all of the loan amount if the value of the property increases over time. For this reason, mortgage debt is sometimes referred to as "good" debt.
Depleting Cash Reserves
Choosing to pay cash for a necessary item instead of going into debt may not be a sound financial move if it depletes your cash reserves. By doing so, you may not have access to the cash you need to cover financial emergencies such as a job loss or unexpected medical bills not covered by insurance. According to the Kiplinger website, a sound rule of thumb to follow is to set aside or save an amount equal to three to six months of living expenses to cover emergencies.
An advantage of not carrying debt is that you can enjoy greater financial flexibility. Instead of having to make regular debt payments, you can use available funds to start an investment program, put money away for retirement or save for your kids' college education. By not using high-interest debt instruments such as credit cards and payday loans, you can also avoid having to pay large amounts of interest, helping you reduce the time it takes to achieve financial freedom.
Peace of Mind
The lack of debt can also result in greater peace of mind. You won't have to worry about losing a car or home due to falling behind on payments or facing legal action from creditors if your credit card debt spirals out of control. You can also experience the sense of freedom from knowing that you are not beholden to a financial institution. Finally, you can avoid some of the health issues that debt-related stress can help to cause, such as ulcers, high blood pressure and mood disorders.
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