Borrowing isn’t a financial sin. But borrowing for the wrong reasons can end up leaving you in financial hell.

One way to recognize good debt is to apply the basic principle of future value. If the future value of the item you are buying can reasonably be thought to be higher than the current value, you're likely taking on good debt. If the future value will be less — if the item will depreciate — that would be bad debt.

1. You want to buy a home. A home is likely to be the single largest investment you’ll make, and most often it’s a good decision, providing you can handle the payments comfortably. As you pay off your mortgage, you’ll be building equity in the property. And all the while, you’ll be able to enjoy your home.


2. You’re financing an education. Whether you are financing your children’s education or packing yourself off back to school, you’re investing in future income. With increased education comes increased earning potential.


3. You want to make a contribution to an RRSP. Pay off your RRSP loan within one year. Longer than that, and borrowing to contribute doesn’t pay.


4. You’re faced with an emergency, but don’t have the cash. While this flies in the face of the theory “Never borrow in desperation,” you have to be flexible. For genuine emergencies, you may have to borrow. If you’re a salesman and your car dies, you may have to borrow to buy a new car just to ensure you can keep making a living. But be certain you take only as much as you absolutely need. Resist the urge to make everything an emergency. And be sure you can work the payments into your cash flow.


5. You’re making home improvements. Depending on the types of home improvements you are making and how comfortably you can work the repayment into your cash flow, this can be a good idea. Making home improvements simply for the enjoyment of your family? Then the repayment shouldn’t cause your cash flow any stress. Making improvements to increase the value of your home? Make sure they are the right kind of improvements. Adding a pool doesn’t increase the value of your home, but renovating your kitchen usually does. Check with real estate agents, and do some research before proceeding.


6. You want to make an investment. Remember, if you borrow to investment and the investment goes into the tank, you’re still liable for the debt you’ve incurred. While interest on investment financing is tax deductible, this shouldn’t be your primary reason for getting into an investment deal. It’s still money out of your pocket. Approach this one carefully, get lots of advice and make sure the repayment won’t strap you financially.


7. You want to buy a second property (such as a cottage or investment real estate). Carefully consider all the tax consequences. Interest on investment property is tax deductible and property can be a very good investment. A cottage can improve your family’s lifestyle and you’ll be building up assets, and that’s very good.


8. You want to start a business (or expand an existing business). In the right circumstances, borrowing to start or expand a business is a good idea. If you’ve done a thorough business plan and cash flow projection — and you’ve been honest with yourself and your banker — you’ll know if this is a good enough reason to borrow.


9. You’re borrowing to consolidate your debts at a lower rate of interest. Paying less interest is always a smart move. However, you should be committed to paying off the newly consolidated debt before taking on more (including using your credit cards). If you’re not committed to throwing your cards behind the refrigerator until the loan has been paid off, don’t bother consolidating. You’ll just be back where you are today (or worse) in a few months.