Personal Finance Ology

Debt not only causes stress and worry, but it could also harm your credit rating. If you miss a payment or, in most instances, are more than thirty days late your creditors report this to the credit bureaus. The negative report in turn has a huge impact on your credibility and your credit score.

When deciding whether or not to take on new debt it is important to consider your debt to income ratio. This is the percentage of your monthly gross income that goes toward paying your debts. The key is to keep this number as low as possible. A rule of thumb is to not have your personal debt exceed, an estimated, 36% of your total income. When working on creating wealth you don’t want any money to have to go towards unnecessary debt. If you want something that will not increase in value; pay cash for it. If you can’t pay cash for it then don’t buy it.

Credit cards should only be used in the case of an emergency. If you find yourself having to use your credit card a lot, slow down on your spending, allocate a plan to bring the balance to zero and discontinue the use of your credit card. Incessant spending is a form of mismanaging your money. This is what puts most of us in debt.

Sources:

http://www.thinkmoney.com/debt/debt-management/debt-management-faqs.asp

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There are many substantial ways to getting out of debt. However, there are some common ways of getting out of debt that are not as advantageous as we tend to think.

Bankruptcy
This seems like the easiest answer because once it’s done a lot of your debt is erased. However, this is where your wise decision skills should come into play. While considering bankruptcy, think about the long-term effect it will have. Now that have you have decided to create financial abundance there is going to be a time when you are able to pay off your debt and take part in many advantageous opportunities. If you file bankruptcy this will stay on your credit for years and that will hinder you from being able to take part in those opportunities.

Remember to always look at the long term effect of your decisions rather than choosing instant gratification and consult the advice of a well researched attorney if you feel the desire to learn more about your current financial situation as it relates to bankruptcy.

Debt Consolidating Companies
A lot of these companies put you on a program where they total up the sum of all your debt and arrange an “affordable” monthly payment. However, in most cases, that “affordable” monthly payment is only paying the interest and doesn’t even touch the principle balances you owe. It would be better to contact your creditors on your own and negotiate a repayment plan that lowers the remaining balance and also does away with the interest rate. It may take some time but anything is negotiable.

Credit Repair Companies
There are a lot of reputable companies to choose from but there are a lot of unreliable companies that perform illegal ways of removing negative items from your credit. When deciding on a credit repair company be sure to do your due diligence and get as many references as possible.

Transfer Funds
There’s the method of transferring the balance from a higher interest card to a lower interest card to save money. This is profitable only if it is done wisely. It is one thing to use the lower interest card to pay off the balance on your higher interest card, however it is not wise to make it a cycle. Once you have transferred the balance from the high interest credit card to the lower interest don’t go and run up the balance on the high interest card again. This only creates a pattern of instability and continuous bad debt.

More Loans
Just as with transferring funds, refinancing your home to consolidate your debt can yield great results. This can happen only if it is done right the first time. After you have paid down your debt and gotten control of it it’s not wise to go out creating more debt for yourself. When you do this you are not only putting yourself in the same position by doing the same things but you are also wasting the equity you worked so hard to build in your home. Therefore, if you are going to refinance your home to pay off your debt do just that and be responsible enough to not incur anymore.

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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.

Photo by: ClassyShots (Mike)

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