We all want to improve our financial position. This actually drives a lot of things that we do. We get a degree because we want to be able to get a high-paying job in the future. When we get a job, we do our best to get a promotion so we can earn more. Everything that we do and the reason we get up in the morning is with the intention to increase our personal net worth.
While that makes us sound really materialistic, we do have noble reasons for doing so. Most of the time, the drive to improve our financial situation is caused by our need to provide for ourselves and those that we love. We work so we can afford the lifestyle that we know we deserve. We want to earn more so we can give our family a good life. Our drive to improve our personal finances gives us a sense of purpose and once we reach it – personal fulfillment.
But is it true that we can improve our financial position by using debt? If you look at the current statistics, it seems like we are accumulating debt like it does not have the power to destroy us. According to the Federal Reserve Bank of New York, the total household debt is already at $13.15 trillion. This is already the highest amount of debt that Americans have borrowed so far. If we are not careful, we might get a repeat of the economic crash in 2008 and never recover.
With that much debt, does that mean it is already too late for us? Not really. The presence of debt is not exactly the real problem. It is our reaction to it that makes it dangerous.
Different ways debt can improve your finances
The truth is, we can use debt to our advantage. But you need to make sure that you are doing it for the right reasons. Not only that, you have to know what type of debts you should be taking advantage of.
Here are the different ways that debt can be used to improve your financial position.
Boost your credit score
First of all, this can be used to improve your credit score. To give your score a boost, you have to make sure that you are using credit and managing it wisely. This is probably one of the most positive uses of debt. Of course, using debt to improve your score means you have to be responsible with debt. You need to pay it off on time and you should not borrow too much. If you have old credit accounts, you should keep yourself from closing them – even if you have no plans of using them because of the high balance.
Get rid of high-interest debts
Some people do not agree that using debt to pay off debt is a good idea. Well, if it can help you save money, it can also be considered to help improve your financial position. For instance, you can use a personal loan to consolidate your high-interest rate credit cards. We all know how the former has a lower interest rate. Debt consolidation is one of the ways you can simplify your payment plan and save money at the same time. Of course you have to make sure you commit to paying back the loan – otherwise, consolidating the high-interest debt would be for nothing. This can also work on your mortgage or student loan. You can refinance to get a lower rate.
Improve your skills
It is also possible for you to use debt to invest in yourself – like student loans. When you invest in your skills, that is something that you can carry with you regardless of where you end up in life. It is something that you can use as leverage to get a higher compensation. With a bigger pay, it will be easier for you to improve your financial position.
Start a business
According to the National Small Business Association, almost 7 out of 10 small businesses relied on financing to fund their startups. These included credit cards, loans, crowdfunding, and venture capital. If you do not want to keep on working for someone else, you can start your own business and borrow money to finance it. Just make sure that you have done your research about the business you want to enter. If you have to use a loan to start this business, you need a solid plan to pay it back.
Invest in a house
Another way that debt can help you is through the equity of your home. Most people have to borrow a home loan in order to buy a house. But like other debts, every payment that you make will be towards the equity of your home. That means the more of the debt that you pay off, you get to own more of the value of your house. This is one of the best ways to use debt to grow your personal net worth. In times of emergencies, you can actually use this equity because it is already yours to spend as you wish. Of course, using the equity would make you lose a value of your house so you need to be careful when you want to use it.
How to be smart with the use of debt
As you can see, there are several ways that you can benefit from using debt. But borrowing it is not the end of it. The effort actually begins after you get approval for the loan. If you want to be smart about debt so you can use it to improve your financial position, you need to do four things.
Have a good credit score
First of all, you have to make sure you have a good credit score. This will help you get the best terms and the lowest interest rate on the loan. The lower the rate, the more money you can save when it comes to payments. If you do not have a good credit score, you might want to improve what you have before you proceed. If anything, building your score will help you develop the right credit habits – like paying your debt on time, etc.
Borrow only for the right reasons
Another thing that you need to do is to analyze why you are borrowing the money in the first place. According to statistics, the top three reasons to borrow a personal loan is for their vehicles, to stay on top of bills, and to get out of a financial emergency. Unfortunately, none of these are good enough reasons to get further into debt. Two of them could have been solved by an emergency fund. The other can be avoided by proper financial management. A good reason could be anything that was discussed in this article. As long as the debt can help improve your financial position, it should be a good reason to borrow money.
Give yourself options
Once you have the right reasons to get into debt, you have to make sure you know your options. This is another way of saying that you need to do your research. By knowing your options, it is possible that you can choose the right type of debt that can help improve your financial position.
Create a plan to pay it back
Finally, once you have chosen the debt that you will borrow, it is time for you to come up with a plan to pay it back. Ideally, you want to have this plan before you get approval for it. If you do not know how to pay this back, you need to postpone borrowing money until you figure out how. This is very important. If you have doubts that you can pay it back, do not push through with it.
If you really want the debt to help improve your financial position, you need to follow these steps. Otherwise, the debt might end up destroying your finances in the long run.