I honestly love the idea of living without debt.

I’m not currently there yet- I can thank daycare, buying my first home, and investing in real estate for that – but being debt-free (while I was there) was a great way to live.

Need a purchase? Just back out the ole debit card and you are in business! Want to treat yourself to a fun vacation? No problem! No credit card bills to suck your spending. But in reality, it rarely ever goes down that way. For example, few people have $200,000 (or more, depending on where you live) to buy a home cash, and in the years it would take to save that $200,000 inflation would likely cause the house to be more expensive anyway. 

And don’t forget, even if you had the funds to splurge, do you really want to blow all your hard-earned cash in one swoop?

That’s not how companies roll.

When they need money for a venture, they protect their liquidity and issue bonds, debt, and borrow money from banks and shareholders(sell stocks) to make their purchases.

So there are times when acquiring debt to cover a purchase is better than spending all your cash.

For instance:

  • Buying with excellent terms like 0% interest, no money down (in an emergency), etc.
  • Buying an asset with cash flow that can pay down the debt and generate income
  • Protecting cash for capital investment

But there is a right way and a wrong way to do this. All of which depend on you being a responsible borrower. So I’ll be very clear.

If you can’t be a responsible borrower, one who loses focus and are capable of going off the reservation when it comes to spending, then just walk away.

I repeat, just walk away.

But if you are capable of making your payments on time, not borrowing more than you need, and never borrowing without a commitment to paying it off, then here are some tips to use debt intelligently to minimize the impact on your financial health when using debt to make a purchase.

Evaluate the true cost of the debt.

Before you make any debt purchase, make sure you determine the full cost of the purchase.

For example, you might want to buy a new car, but the true cost of the new car is not just the price of the loan. You also need to factor in the cost of insurance, increased maintenance expenses, and warranty price – if you choose to purchase an extended warranty, etc.

In order to make a conscious decision, you need to have all the facts and a very clear picture of what the monthly costs will look like. Knowing is power.

Find the cash flow to cover the monthly payment

Any purchase that requires the accumulation of debt should have a predetermined method of how you plan to pay for it. Whether there are current funds to cover the new payment, you need to rearrange funds from somewhere else or if a new method of cash flow needs to be found.

Bottom line is that no new expense should be added without knowing how and where the money will come from to pay the bill.

For example, you need to purchase a car, and the new payment and added insurance will cost an additional $100 a month. Before you sign and drive, you need to determine where the additional $100 a month will come from the cover the bill.

Whether it’ll come from your current disposable income, making a higher down payment, or if you need to rearrange bills, like lowering your cable bill. If you can’t comfortably find the money for the bill, then don’t do it.

Keep a positive balance sheet.

You always want to ensure you’ll be in positive cash flow so think of debt accumulation like energy.

Every new debt acquired needs to a secured equal method of payment that won’t run you into the negative each month. You never want to end up in the negative any month (or worse every month). So, if you are planning to add a debt payment to your monthly budget, make sure your current budget has the cushion to meet this need and still accomplish your financial goals and dreams re. saving, investing, current debt payoff, etc.

No wishful thinking that you’ll get a raise, or will make extra money if you can’t make it work now then don’t promise future funds to cover it.

Don’t sacrifice your future dreams for today’s happiness.

Match the term of your debt with the purpose

It’s not smart to borrow long term on something that has a short-term lifespan.

You wouldn’t take out a 30-year mortgage to pay for a pizza or a pair of shoes, so why rack up so much credit card debt on these short-term items only to refinance your home to pay off those high-interest debts?

While we’re at it, use car loans for care, and HEL/HELOCs for home, student loans for college, etc. because there are advantages to its respective category, For example, student loans have lower rates, and paid interest can be deducted on your taxes. Paying college tuition on a credit card loses the deduction and runs much higher interest rates.

Take it from the law, let the punishment match the crime, and let the debt term match the lifespan.

Invest in value

Focus on value, not just price when you are buying with debt. A brand new $30,000 car is worth that price until you drive it off the lot, then there goes 20% and your car is now worth $24,000. Doesn’t matter how great a deal you got with the financing if the car is already upside down and the value is diminished.

It would be better to buy a used car for $30,000 that is valued at $35,000 that way you have built-in equity and if you need to sell it to execute an exit strategy then you come out with your shirt and a little extra.

Use 0% into rates and promotions responsibly

Introductory rates can be a great way for a ‘pay as cash’ option. But you need to be vigilant on the promotion expiration AND pay more than the minimum balance each month to ensure it is paid off in time.

If you don’t then you’ll be charged the accrued interest over the promotional period which would be no Bueno.If you don’t want the burden of keeping track of the dates and can’t bear to put monthly reminders in your phone (or another fashion to remember) then pass on the intro rates.

Determine a viable exit strategy/ies

None of us really want to have to do this, but you must have an exit strategy to dump the item if the proverbial shit hits the fan. We can plan as much as we can for things to go perfectly, but no one knows what the future has in store.

This plan must be well thought out and available for execution when needed. What will you do with your car if you lose your job and your income to pay for it is gone? Where would you live if your house burned down? Your exit strategy is like insurance, you hope you never have to use it, but if you do, you’ll be glad you have it.

Debt doesn’t have to ruin you

Think about how good it would feel to make the purchases you need to make, and be able to do it with complete comfort.

Even if you need a loan, how relieving would it be to buy with no anxiety? No guilt. No fear. Knowing that your loan is covered, and if the unthinkable happens then you are still okay.

You are able to use debt with the dexterity and precision of a master surgeon. You can leverage debt like a master business owner and come out even better than before.

You have the tools to cleverly use debt. Try them and borrow responsibly

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