Personal Finance Ology

Before we can begin running a business of prosperity and abundance, we must learn as much as we can about debt and the effects it has on us. Many people think that all debt is bad debt and that it should be avoided at all costs or they should pay it off as fast as they can. This is a common misconception and should be rectified immediately. There are two types of debt. There’s good debt and then there’s bad debt. Being able to differentiate between the two is what being smarter about your money is all about.

Bad Debt or consumer debt is the debt you acquired to buy things that will eventually lose value. It doesn’t have an obvious way of helping your finances. Good Debt is debt that’s used to buys things that will increase in value over time. Both play important roles in creating wealth however one is more important than the other. It is imperative to do away with bad debt. Bad Debt only takes up more of your money and adds stress and worry leaving you no space to focus on your goals. Good Debt has a way of adding to your goals by creating opportunities to create more money.

Good Debt
When you borrow money for something that is going to generate more money for you this will prove beneficial in the end. Therefore, real estate loans, home mortgages or business loans are all sources of Good Debt. They will over time create a way to add to your finances rather than take away from them.

Refinancing your home to get rid of the high interest rate on your current home loan is good debt. It saves you money and in some instances will give you some extra cash upfront that you will be able to use for investing or enhancing your home, which may cause it to appreciate in value. Borrowing money for the purchase of a new home is another example of Good Debt. Over time your home purchase will produce equity, which in turn adds to your net worth.

Student loans are also considered Good Debt. An education affords you the opportunity to obtain a job that will increase your earning potential. They even offer deferments if ever there is a financial circumstance that keeps you from paying accordingly. Good debt is a way of making your money work for you. If ever you are going to get back more than what you borrowed, you are in good debt.

Bad Debt

When you buy something that instantly loses value it has no benefit to you. If your purchase has no promise of increasing in value it is useless. A lot of our bad debt is obtained by our desires for material things. We may want the newest car or the latest fashion; all of this is acceptable only after we have created a flow of income to sustain our lifestyle. We often overlook the effects of purchasing items with our credit cards. When we use our credit cards for purchases and are not prepared to pay the balance in full before the due date we are actually increasing the cost of our purchase. Every month you make the minimum payment on your credit cards an interest is added to your bill increasing what you originally paid for the item. Therefore if you opened an account with a store for the 10% or so they offer off of your initial purchase you will eventually pay it all back, if not more in interest.

Bad Debt can be tricky; because we cannot physically see the effects it has on our finances. We just see to it that we pay our balances on time so that we don’t get a late fee but if you took the time to add up all of the interest that’s added on to your balance, it would prove costly and you would be able to see how you are wasting your money.

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A lot of the time, we tend to make a decision based on how we feel before we have gathered any information that will help us to make a calculated choice. Or we may base our decisions off of what our mentors have done or what we think we are supposed to do. These are a few ways we make decisions which can prove to be costly or profitable.

The most important thing to remember is there is no one certain way to make a decision. It should all be based on your desired destination and you should seek out as much information as possible. The more we learn about the different parts of decision making the easier it will be to make decisions that will be the most beneficial.

The ways we make decisions will vary from time to time and some are least likely to get you where you want to be than others. For instance, when you use intuition in making your decision you are pretty much throwing your chances to the wind and choosing to let the outcome be out of your control. I understand the term “go with your gut feeling”, and have even used it in the past, however this isn’t a decision making option I would recommend.

It doesn’t allow you to educate yourself on the outcome and is a lazy way of making a decision due to the lack of effort exerted.

Another way we make decisions is through patterns. We continue to make decisions the way we always have. The way we were taught by our parents or through habit. This way only leads us in a circle and keeps us from ever seeing change or advancement. Finally, there’s the logical way we make decisions. This is where we weigh our options, view the pros and cons and make sure that we are going to get our desired result. This is the way we want to train our minds to make decisions. It is an educated approach that allows us to almost determine the outcome.

Smart decision-making is all about making good judgments. If ever you are at a point of not knowing why you are about to make a decision be sure to take a minute to stop and evaluate it. Analyze the type of decision it is and then choose to logically make the decision by assessing the pros and cons and selecting the answer that gives you long term success. This should open up some thought and keep you from feeling the effects that will come if you simply choose to emotionally decide.
For some the smart decision-making process will cause feelings of fear or uncertainty. Due to the old conditioning and poor decision habits that we are used to taking, a step onto new ground may seem daunting and may cause some concern.

The more personal the decision the harder it may become to make a wise decision over one that will bring some kind of instant happiness. In these types of situations we tend to slip out of objective thinking which keeps us from thinking clearly.

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I find it imperative to talk about the decision making process when speaking on personal finance. I’ve noticed with my past experiences and the experiences of most of those that come to me for advice that the bulk of our financial troubles start from the types of decisions we make with our money.

An important note I always make is if we are choosing to instantly spend money for immediate gratification then it is probably not the best idea. Think about the results of your choosing instant gratification. What was the outcome? Were there any benefits? Were there any regrets? Usually we find ourselves at a loss after the gratification has swiftly passed.

As with anything if it is worth thinking about and planning that means it will in turn bring about a lasting result do to our diligent research. However, anything that we instantly jump into with any thought but just the need to satisfy our hunger, we usually only get that…a satisfied hunger for the thrill but no financial gain.

Due to the importance of this topic I have decided to dedicate a few posts to making smart decisions and the process that goes along with responsible and profitable decision making.

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With the New Year here there’s an inevitable force to make a plan to budget our money with a plan to not run out this year. I must say I couldn’t disagree with this idea more. When we budget our money we are depriving ourselves of utilizing that which we have worked so hard for.
Chart Your Spending

My resolution to this problem is to correctly allocate funds. The correct way to do this is to first chart your spending.  Make it a point to keep receipts of EVERYTHING you buy. At the end of the month write down what you bought and how much you spent on each item.
By doing this you will be creating a visual of your spending habits. This way you can see where you are spending money frivolously and make it a point to allocate those funds to a better cause.

Allocating Funds
With a clearer vision of where your money is going you can now create a new path to spending. You can make a valiant effort to use your money wisely to reach your long-term goal rather than using it to gain instant gratification.
When you use the method of funds allocation it is easier to follow because you feel you are working towards your financial goals as opposed to budgeting that makes you feel you are depriving yourself.

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