Avoid Bad Debt

debt

Avoid Bad Debt

You can really mess up your financial life by using too much bad debt. Compound interest works for you as a saver and investor. When you take on debt, you and your money become slaves to the bank. Compound interest now works against you big time.

Bad debt number one

Credit card debt is by far the worst debt to have. Credit cards are useful though. They are convenient for fast payments, accepted almost everywhere. And, especially handy for online shopping. Sometimes you get cash rebates or other coupon like stuff and more.

If you do not pay the full balance each month you might be paying ridiculous interest rates. If you use the card often and just pay the minimum required amount each month you are probably never going to pay of that debt.

Financing crap

Don’t finance consumer goods like clothes, electronics and cell phones. Car loans fall into this category as well unless your dealer offers 0% financing. Put your ego aside, flip the Joneses and the bankers off, and pay cash for a used car if necessary.

Sometimes banks make it easy to finance vacations. I would not have a relaxing vacation knowing that I have to pay it back over time, with the debt sitting next to me on a beach or wherever…

What about…

Student loans are a bit more difficult. Should they be classified as good debt or bad debt? Hard to answer and it also depends on which degree you’re going for. Try to really minimize student loan debt and even better, try to avoid it at all cost.

Mortgages

Mortgages might classify as good debt because you have a chance that your home will rise in value over time. This appreciation might help recoup some of the interests you pay.

Your mortgage might protect you from rising inflation. If you are a renter and inflation adds 3% per year to your monthly payment you would not be smiling either.

You build equity in your home over time so I’m disagreeing with Robert Kiyosaki here but not entirely either. I believe you home is an asset if it is just big enough to suit your needs and not your wants. I believe that your mortgage payments should be reasonable. You don’t have to finance a mansion you actually can’t afford.

Once your home is paid off there is no need to pay anything but maintenance costs so your monthly expenses drop a bit. This is a big advantage in retirement. Also you can sell your home if you need cash to go live in the old people’s home.

So to summarize: the Joneses are going to have a scary retirement having spent everything while minding the Joneses business. You are going to be in better shape reading this blog, minding your own business and flipping off the Joneses. (I’d better not use this as a site description)

 

 

 

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