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You are here: Home / 3 Christian Living / a Personal Discipleship / Personal Finance / The Hidden Cost of Debt (and a rule of thumb on when to use it)

The Hidden Cost of Debt (and a rule of thumb on when to use it)

August 17, 2009 by mattperman

There is a good article at the Personal MBA blog on the nefarious hidden cost of debt.

And, although not the point of the article, there is a good section on when debt can sometimes be beneficial. This is often overlooked by those hitting (rightly) the note on the dangers of debt and needs to be kept in mind. Here’s the section (with a very good rule of thumb on when to use debt in the last paragraph):

Debt can be beneficial in the same way that fire is beneficial – it can be a useful tool, but you’ll get burned if you’re not careful.

Here’s an example: I used a credit card to purchase the laptop I’m using right now. It’s the primary tool I use in my work – I use it to write, manage this website, communicate with clients, and finish projects. Having a good computer makes it much easier to do my work, so I took on a reasonable amount of debt to obtain a good one.

Taking on a small amount of debt gave me access to a very useful tool 2-3 months before I’d be able to save enough money to purchase one with cash, and actually having the computer gave me the capability to pay it off a month later. That was a good investment, and a good use of debt.

Small revolving debts usually won’t get you in trouble. Debt becomes destructive as the amount gets bigger, either through large investments or the accumulation of small purchases.

The easiest way to stay out of debt is to avoid taking it on in the first place. Here’s a useful rule of thumb that’ll keep you out of trouble: if it’s not going to help you make more money within the next 3 months, don’t take on debt to buy it. That goes for everything from household goods to movie tickets.

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About Matt Perman

 

I am the director of career development at The King’s College NYC, co-founder of What’s Best Next, and the author of What’s Best Next: How the Gospel Transforms the Way You Get Things Done. This is my personal website where I blog on four of my favorite topics: theology, apologetics, culture, and living in New York City.

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