For most people personal debt is unavoidable. Even some of the wealthiest people in the world struggle with their finances. One important thing to understand is that there is a difference between good debt and bad debt. This post will help you discover how to manage money and find your way into becoming free from debt.
Some quick facts about debt that are just downright scary:
Around 50% of every American spends more than they earn every year.
The average household carries more than $10,000 in credit card debt.
In the past decade, personal bankruptcies have increased by 100%.
What is Good Debt?
Good debt is an investment. Good debt such as home mortgages, college or business loans are typically a smart choice. Why? Because they generally do not depreciate. Clearly the housing market crash in the United States does not back up that statement, but keep in mind, many of those affected were head over heels into ‘bad debt’ prior to the economic downslide and could no longer afford that ‘good debt’. Without question, in 5 years almost all homes will go way up in value.
Student or Business loans are another type of good debt. They’re an investment on your future and if intelligently researched they will pay for themselves many times over. Knowing good debt and bad debt will teach you how to manage money.
Good debt also includes items that you must have to live but can’t afford up front. In these instances be certain you can make all monthly payments prior to taking on these kinds of debt.
What is Bad Debt?
Bad debt is making purchase on depreciates or will cost you more money down the road.
“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 of bad debt are buying things aren’t necessary and can’t pay for. On top of that, many people buy these things on their credit cards and wind up not being able to make the full payments. If you borrow cash to pay for items such as vacations, clothes and entertainment and are unable to make the credit card payments you will probably pay a great deal more for that item than it is actually worth.
How Do I Eliminate Debt?
Good debt and bad debt should not co-exist when you know how to manage money. There is an easy way to get rid of bad debt quickly so you can begin to chip away at your good debt. This probably seems like it’s against all logic but attempt to do this: pay off your smallest debt first. This is a great way to create goals, witness the your successes and become more motivated to eliminating your larger debts. Remember to maintain the minimum payments on all other debts. You will see the results and be ever closer to becoming debt free.
Something we all say is: ‘I wish I was debt free.” For many that statement is merely a wish. For some it feels like an unachievable dream. For everyone, becoming debt free is a reality. You can be that person! Remember what causes debt, what solutions are out there in handling debt as well as knowing the difference between good debt and bad debt. There is a way to start making your debt free wish into a debt free reality.
I referenced msn moneycentral for some information and the quote for this article.
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