For many people debt is unavoidable. Even some of the wealthiest people in the world struggle with their finances. One vital thing to understand are the differences between good and bad debt. This article will help you understand how to manage money and find your way out of the red ink.
Some quick tidbits about debt that are frightening: Around 50% of every American spends more than they make each year. The typical household carries more than $10,000 in credit card balance. In the past decade, personal bankruptcies have increased by 100%.
What is Good Debt?
It can be defined as an investment. Good debt such as home mortgages, student or business loans are usually a wise decision. Why? Because they generally don’t lose money. Clearly the real estate crash in the United States does not back up that statement, but keep in mind, many of those people were head over heels into ‘bad debt’ prior to the crash and were unable to afford their ‘good debt’. Without question, in five years almost all homes will be way up in value.
College and Business loans are another type of good debt. They’re an investment on the future and if properly thought through they should pay for themselves over and over. Knowing good from bad will help you learn how to manage money.
Good debt also includes things that you must have to live but can’t pay for right away. In these cases be sure you are able to afford all monthly payments prior to taking on these kinds of debt.
What is Bad Debt?
It is buying something that loses value or may cost you more money in the future.
“When you buy something that goes down in value immediately, that’s bad debt. If it has no potential to increase in value, that’s bad debt.” (Eric Gelb, CEO of Gateway Financial Advisors and author of “Getting Started in Asset Allocation”).
Other forms are buying things you don’t need and can’t afford. To make matters worse, many people buy these things on their credit cards and wind up being unable to pay off the balance in full. If you borrow money to buy items like vacations, clothing or entertainment and are unable to pay the balance of the credit card you will probably pay a great deal more for that item than it’s actually worth.
How Do I Eliminate Debt?
Good and bad debt should not co-exist when you know how to manage money. There is an easy way to get rid of the bad fast so you can start to chip away at the good. This probably seems like it’s against all logic but attempt to do this: pay off debt of lowest value first. This is an excellent way to set goals, witness the results and start to be more motivated to eliminating your larger costs. Keep in mind you must maintain the minimum payments on everything else. You will see the results and be that much closer to becoming debt free.
Something we all say is: ‘I wish I was debt free.” For most that statement is merely a wish. For others it feels like an unachievable dream. For most people, it is attainable. You can be that person! Remember what causes debt, what solutions are out there in managing finances as well as understanding the good from the bad. There is a way to start making your wish into a reality.