Debt has a bad reputation, and rightly so in most cases. Debt causes problems for people that can make managing their finances extremely difficult. However, there is some debt that is hard to avoid but a necessary part of life for most people. This debt, when managed properly, is actually good debt, and it’s what the credit markets are designed to provide. You should be able to divide your debt into good debt and bad debt and work on eliminating the bad debt and effectively using your good debt.
These three categories of debt should generally be considered good debt. Of course, every person’s financial situation is different is some people shouldn’t be looking to take on even “good” debt right now. For those in a stable financial position, these areas should be considered understandable for carrying debt.
– Home Mortgage: This debt obviously isn’t good for everyone, as we can see from the millions of foreclosures this year. However, home ownership is a worthwhile dream and most people aren’t in a position to pay cash for a home. Mortgage loans are nice because they create a tax write off for homeowners. Managing mortgage debt is vital though, and that’s where so many homeowners and lenders have run into problems over the past two years. To keep your mortgage debt manageable, do the best you can to secure a payment that you can afford without stretching your budget excessively. Save before you pay so that you can make a down payment to reduce your monthly payment. If you can make a 20% down payment, you can save money by not having to purchase Private Mortgage Insurance (PMI). In short, buy only what you can afford.
– Education: An investment in a college education is an investment in yourself and can improve your financial position for the rest of your life. As a parent considering how your children should finance their education, it’s tempting to avoid student loans at all cost. However, student loans are a much more attractive financing option for parents than cashing in retirement accounts or downsizing to a smaller home. The best thing a parent can do is to save what they can while their children are growing and then take advantage of financing available for students, including grants, scholarships, and low-interest loans.
– Auto Loan: Most people will agree that mortgage loans and student loans are understandable debts to carry, but some disagree with car loans being considered good debt. However, many people don’t have thousands of dollars to pay cash for a car without depleting emergency funds, liquidating retirement accounts, and putting themselves in a tough financial position. A car is a necessary item to own for most people, but it’s important to be smart about the car loan you take on. Just because you need a car doesn’t mean it needs to be a deluxe SUV or a sports car. Buy within your means with a car payment that you can afford and make a down payment if possible to reduce your monthly obligation. Shop around and remember that new cars lose between 10 and 20 percent of their value the minute you drive them off the lot.
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