At first glance, the data looks bleak: Nearly three-fourths of Americans are in some kind of debt. While that may sound troubling, consider that not all debt is bad. In fact, borrowing sums of money with a legally bound promise to pay it back can demonstrate trustworthiness to institutions and is often a major milestone on the path to building wealth.
Credit: An Upside to Debt
As many millennials are discovering, there’s a downside to their preference for cash and debit cards: a lack of credit history. While reluctance to spending more than one’s income is commendable, failing to engage with debt responsibly means that when it’s time for a new car, house or small business, lenders may be leery about agreeing to better loan amounts and interest rates.
You don’t want to avoid borrowing money entirely, but you do want to practice good credit hygiene. Whether you’re starting from scratch or repairing bad credit, building a solid credit history takes discipline, consistency and time.
Interest Is a Two-Way Street
The irony of interest is that investors tend to “chase returns” of higher hypothetical interest rates when it comes to growing their money but underestimate the cost when it involves interest owed on debts. While interest is a significant factor, the most important determinants boil down to cash flow, and you don’t need to choose between paying yourself and paying a creditor.
Whether your primary goal is to eliminate your debt or boost your retirement reserves, the ideal approach is to direct funds toward both.