Why Debt isn't Always Bad

Photo by Globetoppers

My grandmother was one thoughtful gal.  Perhaps it was her early breast cancer diagnosis and survival that gave her a healthy perspective on the importance of life.  She became an expert pianist, taught Sunday school, and served as principal of an elementary school for fifteen years.  Although they started dirt poor and worked in public sector jobs, she and Grandpa willed over $1.5 million in invested assets to their kids upon their death.

They were the post-depression kids who ate potato soup and butter sandwiches for a decade.  They reused aluminum foil shamelessly.  So it surprised my socks off when Grandma said she would "in a heartbeat" go into debt to travel the world.  My grandma?  The one who saves every piece of gift-wrap paper to use later?  The same lady who drove a ten-year-old car and walked to the grocery store to save gas?

Without blinking she completely agreed that debt wasn't that bad of a thing for some special occasions.  Knowing her character, I suspect she didn't mean to incorporate it as part of a regular financial routine, but rather to have a healthy perspective of spending.  Just where do we draw the line for wallet splurges?

• Growing a Family

On my husband's trip to Africa, the most frequent question asked by men in the local tribe where he volunteered was about children.  "Why do Americans only have one or two children?  You have so much money."  Peering into a one-room hut with seven children, he couldn't muster a decent response.  The old adage rings true: if you wait for complete financial stability to have kids, you will die childless.  We have become confused in our culture to equate children with huge expenditures of money.  Don't get me wrong--it does cost extra money to grow a family.  But not the quarter million that sensationalist media makers like to proclaim.  You may have to forgo the $400 jogging stroller or electric wipe warmer.  Sacrifice is key here, not over-indulgence, which is what most of us assume is required.

The Splurge: Maternity coverage and baby medical bills will top the list of potential debt crashers.  But aside from less expensive (and potential more risky) options like home birth, they are unavoidable.  Stick to cloth diapers, breastfeeding, and second hand stores for all baby gear.  If you are really low on cash, contact your local police department--they often have a surplus of donated car seats that haven't been in an accident.



• Special Travel

No, no, my quicksilver credit card swashbucklers.  This is not a free pass to rack up debt on a yearly vacation to the South Pacific.  And I don't recommend charging the entirety of your trip, regardless of merit.  But some travel can't be postponed--you just have to make a wise call.  I especially don't recommend jet setting if you have a mound of extra debt hanging over your head.  It's far more difficult to enjoy a trip if you're plagued with bills at home.

The Splurge: Consider traveling to other countries if you have friends or family who can put you up for no cost.  Temporary military or time-share placements would allow you to visit whereas you could never afford it.  Seeing family for health or celebration purposes would also be a legitimate reason to pay in plastic money.  



• House

Unless you've saved for a decade and a half plus owe no money for anything else, buying a house will surely tack on debt with interest.  The alternative is even more of a sieve.  Paying rent for that amount of time is a huge burden with no long-term equity--plus apartment living is a nightmare.  Live as far under your means as possible to stash a huge down payment before living out the American dream.  Steer clear of FHA loans to avoid paying extra fees in insurance that you won't recoup.  

The Splurge: Save up at least 20% for your down payment.  That's a wad of cash, but you'll have a much healthier mortgage and room to pay off your loan faster than 30 years.  Pay down the house debt as aggressively as you can without neglecting your retirement and kids college savings.  Make sure your monthly payment is no more than 25% of your total household income and you'll be able to sleep at night.



• Partial Business Investment

So you've dreamed up the idea of the century--it's a "win-win" (even though your spouse isn't so sure) and you believe in it enough to go into debt for it.  Do not, I repeat, do not go into a business with none of your own money.  This seriously impairs your judgment.  What may look like an airtight moneymaker in Monopoly cash, in fact, a total pit.  Ante up your own dough and the outlook becomes startlingly clearer.  You need to have researched the idea completely and be vested financially before moving forward.

The Splurge: Try to make up the difference you need to start your venture with an investor rather than a bank.  And unless you can comfortably live with the loss, don't do it.  Snappy business ideas need not be the bearer of bankruptcy.  But the biggest rewards in business often require the most risk.