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Debt – Good vs. Bad
Unfortunately for most of us, debt is a way of life. Most of us have it, though some have been
fortunate enough to have little or none. It’s almost impossible to live debt-free. Most of us can’t
pay cash for our homes or our children's college education’s. Too many of us let debt get out of
hand. However, when it comes to debt, there is a big difference between good and bad debt.
An example of good debt would be a mortgage. A home can be sold for more than its cost, given the
right conditions. Student loans are considered good debt because they provide debtors with the
opportunity to educate themselves in order to make a better living. In addition, the interest on these
kinds of debt is usually tax deductible. Mortgages and student loans are considered good debt because
they tend to increase your value or net worth. Credit card debt is generally the worst kind, since it carries
the highest interest rates. If not used carefully, credit card debt can add up fast, especially when you
carry a balance beyond your grace period, when the interest starts accruing. It's far too easy to spend
more than you can afford, especially when you pay by credit card. The average U.S. household with at
least one credit card carries nearly a 9,000 balance and personal bankruptcies have hit record highs in
recent years. Other examples of bad debt are car loans and personal loans. These types of loans not
only carry high interest rates, but usually the value of whatever you have purchased begins to depreciate
immediately.
According to most banks your total monthly long-term debt payments, including your
mortgage and credit cards, should not exceed 36 percent of your gross monthly income. More likely,
though, if your total monthly payments to creditors, utilities, food, clothes, and so forth, is anywhere near
your total take-home pay, you’re getting in over your head. It is better to figure out your necessary
monthly expenses, like food, entertainment, clothes, diapers for the kids and so on (a spending plan).
Once this number is established, the rest goes toward debt payoff. Ignore the rules for "acceptable"
levels of debt. Don't be a slave to your money. If you allow yourself to get so far in debt that you have
nothing left over after all your monthly debt obligations are met, you may never get out of debt again.
Start now. Set a limit that is comfortable for you, one that allows you to pay all your bills AND pay an
extra amount on your debt that will help you to eventually get out of debt completely. Of course, avoiding
debt at all cost may not be smart either, if it means depleting your reserves needed for emergencies.
The challenge is learning how to judge which debt makes sense and which does not, and then wisely
managing the money you must borrow.
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