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Brady Mullen
  • Denver, CO
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When Should I Use Debt?

Brady Mullen
  • Denver, CO
Posted Aug 30 2023, 05:59

It's undeniable that debt has the power to consume. Anyone who has let credit card debt run amuck can attest to this.

I'm writing this from a place of humility. I have learned some of these lessons the VERY hard way.

But debt can also be a useful tool.

Think about how difficult it would be to get out of the renting cycle and own your home if it weren't for debt (mortgage).

Many smart businesses use debt tactically and strategically to stay nimble and flexible with their resources.

My point here is not to cast a vote for or against debt - it's too nuanced a subject for that type of judgement. I would like to offer some ideas on how to think about it properly and how to control it.

I think of it like fire - incredibly useful and incredibly dangerous.

For starters, my first test a debt would have to pass before I'd consider it would be if the debt will reliably provide the means to repay itself.

For example, if I get a 70% mortgage on a rental property, and if the income will cover the debt obligations, then this is something entirely different than borrowing money to purchase an expensive car just to impress people.

Debt to produce the income to pay for itself not the only metric I'd look at, but it's a good place to start.

This counts for education, too.

If I am pursuing a well-paying job that I can expect to get after completing the required degree, then debt might be a useful tool for that. And if that job provides me the additional income to pay off that debt, then I can see a valid argument for this.

However, if I want a career that pays roughly $60,000 but requires a degree that costs me $80,000, using debt for this seems like chaining a ball to my foot that will be very difficult to remove.

You can get a $60,000/yr job without a degree. If you're skeptical of this, you're either not thinking hard enough or unwilling to consider certain types of very respectable work. Think trades… $60,000/yr is the low end for many of the trades.

If I REALLY wanted that career that required the degree for personal reasons, then there is nothing wrong with pursuing it! But I'd try to get that degree without the debt. It would fall into the "luxury" category, which should not be acquired through debt.

Anyone else got any metrics they use to determine whether a debt makes sense for them?

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