Protecting your personal finances means living by certain rules. You need to spend less than you earn, of course. To do that, you’ll probably need to set up your own specific rules in the form of a personal or household budget.
You’ll take a certain percentage of your earnings and stash the money in a retirement account (experts recommend 10 to 15 percent), you’ll pay your bills on time, and so on.
But some things don’t lend themselves to hard-and-fast rules quite so easily. Take loans and debt, for instance. Sometimes and in some forms, debt can be disastrous to your personal financial picture.
Short-term debt with a high-interest rate (debt like credit card debt or payday loan debt) is virtually always a bad thing, and it can trap you in the cycle of debt in which you’re constantly taking out new debt to pay down the interest on old loans.
But, in other cases, loans can be a necessary thing — or even a good thing. Below are a few of the times in your life that you may want to take out a loan.
Along the way, we’ll give you some advice about how to keep the debt from hurting you.
1. Student loans
Student loans have become a problem. The United States is facing a serious student loan crisis, and many of the people who took out debt to attend college are finding that they can’t pay off that debt. Needless to say, that’s not good.
Still, you may find that taking out a student loan makes sense for you. The trick is to be careful and realistic about your goals and priorities.
If you’re aiming to enter a high-paying field, then taking out a student loan may make sense; if you’re going to become an actor or a writer, it might not be such a good move.
And you can reduce the amount of debt you take out by attending a community college for two years before transferring to a four-year institution.
2. Home loans
Home loans can be extremely healthy forms of debt because they give you the opportunity to acquire a valuable asset (your home, of course) while getting out of the rental market, which can really eat up your money over the years.
Mortgages tend to have (relatively) low-interest rates, and they also have tax advantages.
But you’ll still want to be careful: Calculate your home-buying budget carefully, work with a reputable lender, and seek financial advice if you feel that you need it (when it doubt, it pays to talk to a financial adviser).
3. Auto loans
Other than homes, vehicles are the most expensive things that many people will ever buy. And while some people can afford to pay cash for their ride, not everyone can.
Given how essential a vehicle is for getting around, this isn’t an optional expense. You’ll have to get a personal car loan.
A car loan can be a perfectly healthy part of your overall financial picture, but you do want to be careful.
Calculate how many cars you can afford, and be sure to remember the other expenses associated with car ownership — things like maintenance, gas, and registration fees.
4. Business loans
So you want to make your own way in the world and start a small business — great! But when you reach this point, you’re going to find that you need a lot of cash. Starting a business, after all, isn’t cheap.
When that time comes, you’ll want to get a small business loan. Generally, that means showing a business plan to a lending institution and securing a loan that you’ll have to pay back using the profits your business generates.
Of course, funding a business can sometimes be more complicated. But no matter what type of business you start, you’ll need money; and no matter who you get it from, you’ll have to make it worthwhile to them somehow.
So be smart and work hard on your business plan. Whatever your passion is, make sure that it makes business sense before you take on debt or make promises to investors.