Debt – the good and the bad
It’s a four letter word – debt – but not necessarily a bad one. If used wisely, the rewards can be significant; approached unwisely, the results can be calamitous.
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If financial freedom is something to which you aspire, a good understanding of the right approach to debt is a must.
Certainly, the single biggest mistake any one can make is approaching every debt as equal. In fact, some debts are considered ‘good’ and other are considered ‘bad’.
Good debts are those that have been used to invest in an appreciating asset, such as property. Taking out a home loan can be a great way to leverage your existing cash and build your personal wealth.
Bad debts on the other hand are those that have been procured to fund depreciating items that don’t add any real value to your financial situation, such as a car or a holiday.
The first step towards financial freedom is eliminating bad debt. The interest charged on such debts, for instance personal loans and credit cards, isn’t tax deductible and unlike the interest on some ‘good’ debts, it will continue to grow as time goes by.
It may be tempting to ‘just put it on the credit card’, but this common call can be a recipe for disaster.
By eliminating bad debt, you’ll be in the best position to expand your investment portfolio or buy that new home you’ve been dreaming of.
If, unfortunately, you boast a rather large number of high interest bad debts that you cannot pay off easily, it may be worth consolidating these debts into one.
This may mean you can secure a single, lower interest rate. Even if you can’t, you will still only have to manage one lot of loan repayments as opposed to a whole plethora of bills.
To tackle your bad debt head on and get your financial future on track, here are a few tips for you to follow:
TIP 1: Just stop. Cut up your credit cards and avoid adding any new bad debt to your load.
TIP 2: Draw up for yourself a weekly or monthly budget so you can account for every dollar.
TIP 3: Pay off the most expensive debt first.
TIP 4: Make extra repayments as often as you can.
TIP 5: Limit spending to necessities only. Motivate yourself to do this by setting a timeline and reward yourself for sticking to it.