Know the Good and the Bad about Debt!
The very word ‘debt’ seems to connote negativity in one’s financial soundness. Is it really possible to lead a life without borrowing any money? How many of us actually have the capacity to deal with only cash transactions and never use credit? Borrowing money can never be an indicator of an individual’s economic status, but debt sure can be. When you look through your monthly payments, you tend to get overwhelmed by the amount of money that goes out. Sometimes debt problems do seem to be a dark tunnel with no end in sight. Take a minute to consider your debt along the following lines before you decide on a debt management program –
Have you borrowed to purchase an asset? Taking out a loan to purchase a house or a piece of land is debt that benefits you simply because the value of the land or house will appreciate over a period of time and contribute to your overall financial health. Hence this is a ‘good’ debt. Similarly when you take out loans for business expansion, it is automatically considered ‘good’ debt.
Money borrowed for educational purposes Student loans are good debts.They enhance the individual and elevate him to a higher economic position in the future. This investment is obviously one that fetches good returns. When paid back on time, any debt eventually becomes good debt. This includes anything you need but can't afford to pay for up front without depleting your cash reserves or liquidating investments. In cases where debt makes sense, take loans only for that which you are sure you can repay in the same month. Always remember that when a lender looks at your credit report, good debt always reflects positively on your financial status. The following debts fall into the next categoryMoney borrowed for consumables
Any form of credit used for the expenses of holidays, electronics or even everyday necessities fall under ‘bad’ debts. These have no return on investment, and you are safe only as long as you are able to pay them off each month. You certainly can live without a holiday that leaves you deep in debt! Credit card debt
It's far too tempting to spend more than you can afford, especially when you pay by credit card. Every month that you make only a partial payment toward your credit card balance, the interest accumulates on rest of the amount. The worst form of debt is credit card debt, particularly due to the high interest rates they carry. Experts advise that ideally your total monthly long-term debt payments, including mortgage and credit card debts, should not exceed 36 percent of your gross monthly income. Keep constant tabs on amounts borrowed and track the late payments if they cannot be avoided altogether. It is not entirely possible to live without debt, but would be wise to be aware of those that help you and those that don’t!
Published on Jan 31, 2011
The very word ‘debt’ seems to connote negativity in one’s financial soundness. Is it really possible to lead a life without borrowing any mo...