What and How to Handle Debt
Welcome to my series, How To Use Money To Make You Happier.
In the introduction section, I gave some stats and mentioned a few reasons for starting this series.
I am going to break this series into a couple of steps:
- Introduction
- Make SMART financial goals
- Create a budget
- Income
- Expenses
- Needs and wants
- Debts
- Difference between good and bad debt
- Pay off debt
- Use the credit to your advantage
- Give to charity
I’m living so far beyond my income that we may almost be said to be living apart ― E. E. Cummings
You must gain control over your money or the lack of it will forever control you ― Dave Ramsey
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery ― Charles Dickens
Introduction
I have spent more than two decades working in the wealth management business. Before that, I used to lend money. As a result of this experience, I volunteered to counsel people on their debt. In conclusion what I learned was that people are drowning in credit cards, personal, consolidation, payday, and mortgage debt.
The whole goal of my blog is to empower you. The reason for this series is how to use the money to make you happier.
What is debt? Is it a monster? Or is it something that if used wisely can help you achieve some goals.
In financial terms, when a bank, credit card company or an enterprise lends money to another person is the creditor. The person who receives the credit or the funds is the debtor. Debt means you owe someone money and credit is when something is given to you in the form of money. A loan is a contract between a debtor and creditor which defines the terms by which the debt will be repaid.
The amount borrowed is called the principal. The amount of time the debtor has to repay the principal is the term. The creditor makes money by charging a fee which is called interest.
Difference Between Good and Bad Debt
The most common personal loans are student loans, car loans, home equity, credit card, mortgage, and payday loans.
These loans are either secured or unsecured. A secured debt is when the creditor asks for collateral in the form of a house. A mortgage is an example of secured debt.
Credit cards and lines of credit where there is no collateral are examples of unsecured debt. The creditor is giving you money based on your income, job history, and credit history. These kinds of loans require minimum payments, carry high interest, and are dangerous.
Unless you inherit money, you have to get into debt either to buy a home, go to school, or to start a business. It is very important to look at what is good and what is bad debt.
If debt increases your net worth and continues to grow in the long run then it is considered good debt. I personally took out a line of credit to do an MBA. That investment has resulted in my income, knowledge, and contacts increasing my net worth. It increased my value as an employee.
I bought a home in 2004 which has tripled in value in 15 years. The mortgage payment was equal to me renting a two-bedroom condominium.
Another good example is when you borrow to buy a good stable business or a well-known franchise.
I personally recommend that you lease a car rather than buying a brand new car. Here is my issue with buying a new car. The depreciation of the car. The decrease in the value of an asset is called depreciation. If you pay $20,000 for a brand new car. As soon as you drive it off the lot, it loses 10% of its value. In a year, it loses 25% of its value. In three years, it is worth less than 46%. Good debt is one that increases your net worth. In buying a new car, you are paying for an asset whose value keeps on going down. If you are self-employed, lease a car.
Bad debt does not increase your net worth or generate income. Bad debts have high-interest rates. Credit card, borrowing to invest in the stock market also called leveraging, payday and cash advances are examples of bad debt.
Pay Off Debt
The best way to pay off your debts is by having a budget. I have already written about keeping track of your expenses and save any surplus. Keep a track of all your monthly debt payments. You also need to be aware of the interest rates on each. The debt with the highest interest rate needs to be paid first.
If you have countless credit card debts, personal loans, and other debt, I strongly recommend getting a consolidation loan. This loan will have a lower interest rate and will be one payment a month. If you have equity in your home, get a home equity loan or add it on to your mortgage.
Use Credit to Your Advantage
Credit can be used to your advantage. I have given examples of how you can use credit to buy a home, get a college education, or start a business.
How about using a credit card which has points or different advantages. If you have the funds in your account, make a major purchase or your groceries on the credit card. Get the points. Invest the funds in a high-interest account for a month. Get the interest on that money. When the time comes to pay the bill, withdraw the funds from the account, and pay the bill. This is a win-win situation. You have got your points, you got interest on the money you deposited and you also paid your entire bill on time.
Conclusion
I taught a course on financial planning for five years. I also volunteered for two non-profit organizations in the area of credit counseling. I noticed that the same people were taking the same course every year because it was free.
There are times when you just have to see a credit counselor. Make sure they are looking out what is best for you and give you a plan.
I also recommend that in some cases you might need professional counseling or to see a life coach. My goal is to empower you to lead a balanced life. You have to have the physical, emotional, spiritual, mental, and psychological areas of your life in balance. There are times you might be compensating by overspending or shopping too much to make up a deficit in other areas of your life.
Here is my call of action. Make sure you have your debts under control. Write to me about how you are faring in this area.
Photo Credits: Alice Pasqual Ian Espinosa
Hello fellow personal finance-r! Glad to see there’s more of us out there being money conscious on our spendings and debt.
if there is anything i hate it is debt so i try no to get into it by all means
Debt is such a slippery slope! I’ve been on both sides of the fence with good debt and bad debt and I much prefer good debt! Great read. I’ll have to check out the other links as well. Thanks for sharing. I may also hit you up for some counseling. 🙂
Debt can but a huge strain on a relationship, a good friend of mine recently went through a bankruptcy due to how in debt her husband had become and I know it was hard on both of them. I always try to stay ahead of everything and make sure I save a bit to prevent anything like this but things happen so you never know where you could end up.
Great post. It is so easy nowadays to get into debt. On television in the UK, we are bombarded by ads for immediate and guaranteed loans. When the washing machine or fridge break down, those adverts come on are are so tempting for some people. But the interest rates are shocking. I’ve never been well off, so I’ve always learned to be careful. I love my credit card which gives points for my shopping. I always feel like I am winning with that.
We worked hard to get rid of our debt several years ago. It’s very freeing not to owe anything. Unfortunately things arise from time to time, but it’s good to know we can take them in small doses now.
Thanks for explaining the concept of good debt. I rarely hear about good debt and it’s easy to think that debt would all be bad. I know better after reading this.
Great read! My husband and I are currently in the process of getting our debt paid down to live a more financial stable life.
I agree wholeheartedly about keeping a handle on debt. I do use credit cards but make it a habit to pay the balance in full each month. If I make an especially large purchase (I’m going to Europe in June so put my airline ticket on a credit card that gives me points) I may or may not split it into two payments.
I think the biggest downfall in our society when it comes to debt is the failure to educate children/teens about it before they are thrown out into the real world to sink or swim. How many young people mess up their credit by taking out their first credit card and spending everything they can without realizing the impact it will have on them?
Great guide for all and especially the younger generation to plan for future happiness. A methodical approach. Appreciate.
Debt sucks…. Try and only spend money on what you can afford….. unless you’re Donald Trump
Love articles about money! I’ve thankfully never gone into debt before and know that I will do so only when I buy my first home.
I always try to stay from debts. But I have friend who may find some help through this post. Gotta share. 🙂
It can be hard on some people, I try my best to keep off debt.
I hate Debt so much. I always try to avoid it but sometimes it can be difficult. Great tips.
We live debt free and believe in financial freedom. The steps you’ve outlined are so important for personal wealth and well being. Having a strong financial foundation is so important to stability in all aspects of life.
Budgeting and finances are such a pain for me! never easy to manage and get everything right. I still have a lot fo work to do
I had no clue there was good and bad debt. As always, you’ve taught me something new, Jerry! This is why I love reading your blog and am so glad we connected. I honestly always considered debt to be just debt, and that’s a bad thing. I also never considered leasing a car. I know they depreciate, but always thought that was something you had to just suck up and accept. Leasing seemed like renting a house, in the sense that you’re just paying someone else instead of simply buying it yourself. I was very interested when I got to that part in your post and see your reasons. That is definitely something I’ll be thinking about when it comes time to look at new cars.
If you have a business it is better to lease as you can write it off. If you want to buy a car, buy it two years old. Thanks Erica for your comments and input. It is readers like you that make my day.
This post speaks to me. My goal this year is to eliminate my credit card debt and I finally realize the importance of having a budget and stick to it. Thanks
I completely agree about their being good debt and bad debt. Taking out a loan to further your career being good and taking out a loan to waste on luxuries or expensive holidays being bad debt.Both can be dangerous however if something in your life changes for the worse and you cannot repay the debt.
Debt can really weight down on relationships and family life. It is not an easy thing to shake off, but if you can take the right steps, over time it can become a non issue, it just takes a lot of self discipline.
The ease of acquiring debt seems to be the downfall of many. Great piece of information like this will always be a great resource to people that need knowledge on how to get out of debt.
Great advice, it puts things into perspective. And now that I’m starting my own business AND our old car is giving signs of letting go, I might now seriously consider the possibility of leasing (which was in the back of my head – you’ve offered me some good points here!)
We use many of these strategies to stay ahead of the game and one thing we really take advantage of, is moving debt to interest-free card offers and then chipping away by calculating equal monthly payments to make sure it’s paid off by the time the intro. offer expires. Sure, there is that 3% balance transfer fee, but it pales in comparision to the revolving interest! Great article!
Great post! It’s so easy to get into debt and do hard to get out of! I’m at the point thankfully where so many things are paid off…my house, my car…and I don’t have credit cards. Thanks for sharing your wisdom.
I should show this article to my parents and I am sure this will help them since they don’t want to listen to me.
This is great information, understanding the difference between good and bad debt, and how to manage both is so important.
Really helpful post on how and when to use debt wisely! Thanks for sharing!
I like your suggestion about using the credit card for the rewards points and keeping you cash in the bank until the bill is due. I’ll have to try that one!
Great post! Really helpful explanations of good debt vs bad debt.
Great and informative post thank you especially thought provoking about the use of good debt. Thank you!
Great post! I always love when someone talks about good debt and bad debt- it’s not ALL bad, but you do still have to pay it off!
I like the idea of good and bad debt , such a great concept. I will look into cards that have points and cashback. Thanks for the information.
It’s great that you council people that are in debt over your head! I have met a few people that lived in so much anxiety, because of the debt crises the had created.
My personal mantra is there is only two reasons to purchase anything on credit:
1. A car that I need to get to work (only if I need it for that purpose and the least expensive option that gets me there reliably)
2. A home, because on normal income to save up enough money for a house takes too long. Again, only buy a house for a price you can afford.
Excellent post regarding debts. I really love the points you included to bring clarity with good and bad debts. Thank you for taking time to write this important post.
Pastor Natalie
Letstakeakeamoment.com