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Here are five instances where debt can become a bad thing, however, and should be avoided at all costs.
There are certain things you just can’t buy with cash if you don’t have a considerable income or substantial savings.
A house is a perfect example of this, but taking out debt to buy a home isn’t so bad. Why? First, you can use it to put a roof over your family’s head for several years. And second, it can appreciate in value.
Other things, however, are best left alone if you have to take out debt to purchase them. Here they are:
1. Holiday gifts.
Have you made it a habit of starting every year not only broke, but also with loads of brand new debt? If so, you can probably blame that on excessive holiday spending and buying tons of gifts using credit cards or even loans.
While you may get plenty of joy when giving gifts, you don’t want to do it while putting yourself in debt. Doing so can create a hole that’s impossible to climb out of. And it could make it impossible to pay your essential monthly expenses.
Whether it’s Christmas or any other holiday, set a strict budget for spending and stick to it. And remember, the holidays should be about the experience and spending time together, not material things.
There’s nothing quite like going on a relaxing vacation and coming back to a big bill. That’s why you’re better off saving up for a vacation and using cash versus putting it on credit.
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Use a sinking fund to pay for the vacation. This is where you estimate the total cost of your trip and divide it by the number of months until it begins. That number will tell you how much extra money you’ll need to save every month to make the debt-free trip a reality.
3. New cars.
Yes, that new car smell and the thought of you being the first behind the wheel can be intoxicating. But, when you realize that a new car can depreciate extremely quickly, a used vehicle probably sounds much more attractive.
Used cars are often more expensive from the jump, meaning you’ll need a bigger loan to get one. Add in the fact that they can depreciate nearly 25 percent in one year and 60 percent after five years, and you’re looking at a not-so-smart purchase.
If you have the cash to buy it outright, go for that new car. If not, stay within your means and get something cheaper that’s used and has already taken its big depreciation hit.
While you may not enjoy that expensive Hollywood wedding, you won’t regret taking money meant for a wedding and putting it towards your first home instead.
Having to pay for a wedding you went into debt for years later can put a significant damper on that special day, so avoid the temptation to overdo it with the festivities.
5. Your children’s college education.
Your child can probably get more favorable loans for their college education than you can as a parent when it comes to interest rates and forgiveness.
Let them take out their own student loans so they can learn financial responsibility firsthand.