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Articles
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Written by Administrator
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Saturday, 28 November 2009 01:36 |
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1. Reduced income/same expenses. Too often we delay bringing expenses in line with a reduction in income for a host of good reasons and let debt fill the gap. The sooner you adjust to your new reality, whether it be temporary or permanent, the better off you'll be.
2. Divorce. More than half of us do it, some more than once. I can think of few things more expensive and likely to put you in debt. For those of you who have never done it and would like to get some idea of the impact, sell all your assets and get the money in $50 bills. Go to a hotel on a busy street, and you and your spouse open two windows and see who can throw the most money out the fastest. It can be breathtaking.
3. Poor money management. A monthly spending plan is essential. Without one you have no idea where your money is going. You may be spending hundreds of dollars unnecessarily each month and end up having to charge purchases on which you should have spent that money. Planning is no more difficult than writing down your expenses and income and reconciling the two. You will be surprised at how powerful you'll feel when you are making thoughtful decisions about where and when to spend your money.
4. Underemployment. A close cousin to No. 1, people who experience under employment may continue to think of it as only temporary or if they are coming off unemployment feel a false sense of relief. Yes, you deserve a break, but this is not the time. Get those expenses in line with your current income. Down the road if you increase your income due to more hours, a second job, or a better job, then is the time to start adding in some of the previous spending before you became underemployed.
5. Gambling. Call it America's new entertainment or (considering the boom in tribal casinos) the Indian's revenge. Either way there is a guaranteed exchange of money from you to "the house." It can be addictive, hard to stop and loans are freely available. Gambling establishments may be the only place you can mortgage your house while intoxicated and have it be legal. I'm sorry, I forgot -- this is entertainment!
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Written by Administrator
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Saturday, 28 November 2009 01:35 |
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The amount of personal debt in this country is ever-increasing, and a large part of the reason is that credit has never been easier to get. Whereas credit card issuers previously looked for customers who could repay, today card issuers relish the chance to reel in those who'll continuously charge beyond their means at 18 percent or 20 percent.
But debt is a complex concept. Not all of it is good -- a fact a surprising number of Americans fail to realize until they're in the hole -- and yet not all of it is bad. When used intelligently, debt can be of tremendous assistance in building wealth.
One of the secrets, therefore, to being smart with your money is to differentiate between good debt and bad debt. While the differences often seem logical, it is a logic that apparently is missed by many Americans.
"When you buy something that goes down in value immediately, that's bad debt," says David Bach, CEO of Finish Rich Inc., and author of "The Finish Rich Workbook." "If it has no potential to increase in value, that's bad debt."
Good debt
"Good debt is investment debt that creates value; for example, student loans, real estate loans, home mortgages and business loans," says Eric Gelb, CEO of Gateway Financial Advisors and author of "Getting Started in Asset Allocation."
Robert D. Manning, a professor of finance at the Rochester Institute of Technology, also recommends taking on debts that are tax-deductible and debts that produce more wealth in the long run.
"If you are talking about reducing current debt, that's where it starts to get nuanced," says Manning. "If you take a home equity loan because you have 17 percent credit card, and you go with a 6 percent loan that's tax-deductible, that's good debt."
These general rules of thumb set some clear delineations -- buying a home or refinancing to get rid of excessively high rates is usually good debt, as is generating debt to buy high-return stocks, bonds and other investments.
Bad debt
The concept of bad debt comes in when discussing the purchase of disposable items or durable goods using high-interest credit cards and not paying the balance in full.
"The trouble is most people are not organized enough to retire the entire balance before the due date," says Gelb.
Every month that you make a partial payment on your credit account you are charged interest. The disposable or durable item you purchased continues to lose value, and the amount you paid for it continues to increase.
"When you buy clothes, they're probably worth less than 50 percent what you pay for them when you walk out the door," says Bach. "So if you borrowed to pay for them, that's bad debt."
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