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5 Smart Ways to Use Debt to Improve Your Life

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Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving BackKimberly Palmer is the author of Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back, which was published by Ten Speed Press this week. The following post has been adapted from the book. She’s also the author of the Alpha Consumer blog at USNews.com, where she’ll be hosting book giveaways all week.

Shortly after meeting my husband, he tried to convince me that debt was a good thing. His student loans, after all, were not only funding his tuition but also many of our first dates. Using something called the “income smoothing theory,” he argued that it was better to borrow now, when we had little money, so we could live better than we otherwise would, and then pay it back later, when we (hopefully) had steady incomes. (Of course, to us at the time, living well meant being able to buy cheap Thai food and beer.)

While his theory falls apart if it’s taken to extremes, for the most part it makes sense. Debt can be a very good thing, as long as you use it wisely. Here are five ways you can use debt to improve your life.

For those of you expecting another installment of Scam Week, I thought we’d take a little break mid-week. I’ve been friends with Kim for a while and with her book coming out, I thought having a guest post by her would be a nice change of pace. I hope you enjoy it!


Take out certain kinds of student loans.

Students loans are often referred to as “good” debt because they allow you to earn more money later. Plus, subsidies from the federal government often allow borrowers to lock in low interest rates. And it’s true, using student loans to get new skills that allow you to pursue the career you want can drastically improve your life. In fact, research from the College Board shows that a college degree plays a huge rule in how much money you can expect to earn: The median income for college grads over age 25 is $55,700; for those with high school diplomas, it’s $33,800.

Just don’t use the “good debt” argument to fool yourself into pursuing a degree in a field you don’t really enjoy, or one with less-than-promising job prospects. Many unemployed MBA-holders are probably wishing they weren’t carrying $200,000 of so-called “good” debt right now.

Invest in professional expenses.

Putting money into a new suit for your first day of work or a certification program that lets you get a promotion can also help you earn more money in the long run. If you recently graduated and have no cash to buy your new work wardrobe, or any other essentials to your new career, then it’s okay to charge them on a low-interest rate credit card. Just make sure a big chunk of your first paycheck is dedicated to paying down the debt so it goes away quickly.

Take advantage of auto loan subsidies.

Auto dealers often offer special subsidies on auto loans or other kinds of discounts when they’re trying to move certain models (especially older or less popular ones) off their lots. If you’re flexible on what you buy, consider shopping based on the subsidies available. It could mean the difference between a five percent interest rate and a seven percent one, and if you need the car for work or your family, that could be a good investment.

Manipulate credit cards to your advantage.

Credit cards often come with some perks hard to find elsewhere: Automatic ID theft protection. Travel insurance. Zero percent financing for limited periods. Rewards points, even when you pay off your bill each month. Many companies are now also offering free software that allows you to quickly analyze your spending from your online account. If you can pay off your balance each month, then you essentially get all those benefits for free (just make sure your card carries no annual fee).

Avoid the dark side.

Overspending on credit cards means fees, high interest rates, and lots of financial stress. The new credit card rules require card companies to feature more information on monthly statements, including how long it would take to pay off the debt if you make only minimum payments, or how much you have to pay to unload the debt in three years. Paying attention to those numbers – and to any changes to your card policy that arrives in the mail – can help you avoid falling into a debt trap.

For more details on Kimberly’s book, visit www.generationearn.com.

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13 Responses to “5 Smart Ways to Use Debt to Improve Your Life”

  1. Shirley says:

    I have never thought of debt as “Good Debt” but rather as ‘Smart Shopping’. I realize that they are the same thing but I guess the word ‘debt’ has a negative connotation for me.

    Last month we bought a new pickup and shopped for the best price. It’s a 2010 Work Truck (no fiber carpet or power windows) and ready to be moved off the lot.

    By financing through GMAC we received an immediate $5,500 off of the purchase price. We will make two monthly payments at 4.30% and then pay it off… sorry GMAC, you don’t get your money back from us.

    Part of the down payment was on a rewards CC and netted us $50 cashback… that will definitely cover whatever interest we pay on those two installment payments.

    I guess I have to concede that this is ‘good debt’. :-)

    • cubiclegeoff says:

      I like your view of calling it ‘smart shopping’. If I’m buying a car, I’d prefer a 0% interest loan, since it benefits me. I also use credit for everything, since I get a benefit (although if they start charging more for credit card purchases, I’ll switch to cash).

      ‘Smart shopping’ doesn’t fit with student loans though. But they can be good debt. Many could consider a mortgage good debt, but I could see this as controversial.

  2. billsnider says:

    I define good debt as when you can use someone elses money to make money for yourself.

    Borrowing at 10% to earn 5% is not good debt.

    Borrowing at 5% to earn 10% is good debt.

    Bill Snider

  3. RobMar says:

    There is a reason DEBT is a 4-letter word. Debt is NEVER “Good” but rather a tolerable means to reach an end-goal. I understand borrowing to leverage the fulfillment of a future goal: College Education, a home and even an automobile in certain situations. However the Credit Card companies have made Billions on realizing that self-discipline and a high-balance credit card are a toxic (Profitable) combination. With that said, everything in Moderation might be allowable. But be very careful. Debt and its associated stress may have you using a lot of other 4-letter words.

  4. zapeta says:

    Interesting list. I’d rather pay cash for a reasonable used car, but if you could get 0% financing on a new car and put that money to work elsewhere it might be possible to come out ahead.

    • cubiclegeoff says:

      That’s what I’ve done before. And now I’m considering a used car and paying with rewards credit cards, which will be paid off in the next billing cycle. It’s a win-win in this instance.

    • Shirley says:

      By financing through GMAC (which will be paid off after the two required installment payments) we received an immediate $5,500 off of the purchase price. Those two payments allow the dealership to get their money (our discount) back from GMAC.

      I feel like we came out ahead on this one, especially so since the $50 cashback will make up for the interest on those two installments.

  5. Norman says:

    When I was younger, I starting thinking about establishing credit so I went to the bank and got a personal loan for tires that I needed. I had the money in my savings account and the banker gave me the loan as a way to start establishing credit. I paid it off faithfully knowing that I could pay it off at any time. I know that someone could get along fine without ever using credit, but I do think its wise to establish a good credit history. This was a long time ago, so it may be different today. Credit wasn’t so easy to get “back in the day”!

  6. FlyFisher says:

    Great advice. Debt isn’t always bad, just never take it lightly.

  7. PinchaPenny says:

    I think calling debt good is a stretch. Buying in cash is a amazing habit that people can fall into. Obviously forking out $50,000 or more for college is pretty hard if not impossible to do with out taking out a loan. But If you have to get into debt for your education make sure that you are studying something that will enable you to pay it off quickly. Otherwise I would encourage seeking out cheaper ways of getting an education.(spending the first 2 years at a state school or community college)

    Credit card companies are not out to loose money, they do not offer awards or benefits so that they can loose money. If a balance goes unpaid even once you may be losing by using your credit card.

  8. NCN says:

    I’ve heard and read similar points for years. Here’s what I KNOW, after living without credit card or automobile debt for more than 4 years. I sleep better, I worry less, and I never have to worry about late payments or interest costs.

  9. Ditto NCN. The best form of credit is none at all. It certainly is a form of contentment to be debt free. As the article says about the dark side, it certainly is true. Why is it that most households are in massive credit card debt. Leverage is a two edge sword, it cuts if your not careful. I would rather not have that sword.

  10. Robin says:

    I’d call it “smart” debt (rather than good). I was raised with the idea that it was almost sinful to own a credit card, so it took me a long time to feel comfortable about taking on a certain amount of debt as part of a smart financial strategy. But once I learned to look at the big picture, I realize that you have to, well, look at the big picture.

    I used financial loans at zero interest to shave a year off the time it took me to graduate. That meant I got to start earning a higher salary a year sooner, paid off the loans within two years, and still had more money left over than I’d had while in college slaving away for peanuts. I used some of that extra income to decorate my apartment and to enjoy having colleagues over for dinners, which helped me start building my professional network a year sooner as well.


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