Debt is not necessarily bad. When well managed, they allow us to boost our financial well-being and get closer to our goals and dreams. For example, when you ask for a loan to buy a house, that debt is a good decision because the house is an asset that appreciates over time.
However, sometimes debts stop being a tool to improve your finances and become a burden that consumes a large part of your income and an obstacle to your peace of mind and economic growth.
Also read: How to eliminate debt
To avoid excess debt, you should apply the following basic strategies whenever you think about acquiring a loan:
- Productive credit.
The best debt is the one used on a productive asset, like a home or business. That asset generates its own income or appreciates, and it is from said income or appreciation that the debt can be paid off faster. - Analysis of the economic environment.
It can be dangerous to take on debt when the economic outlook is not good. If you think that your income is going to decrease or that there is a risk of losing your job, it is preferable to stop any debt plan. - Consumer credit with measure.
Obtaining a debt to spend on consumption is what causes the biggest problems. If you finance your consumption with credit, try to do it only in emergency situations or when you feel very comfortable paying the installment of that new debt. Remember that consumption must be covered by your income. If you’re overusing credit for consumer spending, it can be a red flag that something’s wrong with your finances.