When it comes to finances, most of us are uncomfortable with big expenditures and big debts.
We associate debt with credit cards and interest, and we think that saving money is about avoiding expenditures. And we’re not completely wrong – but we’re not completely right, either. After all, we’re always hearing about billionaires and millionaires owing huge sums and buying huge assets. If they have so much money, why would they take out a loan? And if they’re so finance-savvy, why would they spend so freely?
The truth is that debt and spending can actually make you money – provided that you use these tools carefully.
Spending money to make money
You have to spend money to make money, as the old adage goes. But what does that mean?
Most of us understand that there’s no way to make money without a little overhead, like the rent on your business space or the suit you buy so that you can work at the bank. But it’s not just the basic requirements of doing business that we ought to spend money on. In fact, smart spending can make your business more efficient, your home more valuable, and your nest egg grow faster.
And if you want to know how to spend money, look at where you’re already spending it. This is why companies outsource bill payment and invest in expense management services: they recognize that the very process of spending is something that further spending can make more efficient and cheaper. Similarly, expensive things in your personal life may clue you in as to where you money should be going ahead of time. Dealing with expensive home repairs? Maybe you should spend more money – but focus on maintenance, so that you’ll save by avoiding repairs years from now.
Loans and good debt
On the face of things, loans have all the same problems as spending – and then some! When we take out a loan, we’re often doing so to make a big purchase. On top of that, we end up paying more money in the form of interest.
It’s certainly true that loans with high interest rates are bad for your financial health. Credit card debt, payday loans, and other forms of short-term debt tend to be bad ideas. But larger loans can actually be good for your overall financial health.
That’s because certain types of loans – such as USDA home loans – have lower interest rates, encourage good financial habits, and have tax benefits. This is why some billionaires still have mortgages: in this case, a loan can actually save you money! By holding onto their own money and investing it while taking advantage of the tax breaks that come with mortgages, this bigwigs can make up for their losses on interest payments and stack some profits on top to boot.
We non-billionaires can benefit from understanding the role of healthy debt, too. While the 2008 financial crisis made it clear that we should be careful about the mortgages we take on, a mortgage that’s within your financial reach can be a healthy investment. You’ll gain a home and an asset (which can increase in value with the real estate market). And tax breaks and the relatively low interest rate on your mortgage will make it manageable while giving you the financial flexibility that comes with not having all your money tied up in a cash payment.
Ultimately, of course, each person’s financial situation is different. The type of spending and loan management that is right for you might not work for another person. Think carefully about how you’ll manage your money, and consider spending smart on one more thing: a financial planner, who can help you work out the details of your plan.
