In our article last week we spoke about facing the real problem, continuing our series of articles on the 7 most common mistakes keeping us stuck in debt, this week, we look at why making debt a priority is important.
Interest can pile up fast.
The main thing to get into your head right now is that you can’t put it off. You can’t decide to save for a new car before paying off your credit cards. And definitely don’t pay off your Bond before you pay off credit card debt.
You’ve probably heard of the concept of good debt vs. bad debt. Good debt is associated with an investment— a bond, for example. This assumes you make a good choice and don’t overpay for a home.
Although it isn’t the clear-cut financial win it used to be, most of us still want to own a home. It’s a source of pride and often brings a tax deduction. This all assumes you don’t get a bond you can’t really afford, of course.
Student loans are another example of good debt. But if you go overboard with student loans, you might not gain the advantage you seek (job income vs. student debts). A good rule of thumb is that your student loans should not exceed the amount you expect to make in your first year of work.
Another example is a business loan. It’s risky, for sure, but your plan is to use the capital you borrow to create a business that provides a source of income. This is what I mean by good debt. You take a calculated risk when you borrow, but you gain something that could make you better off financially down the road.
Okay, now let’s take a look at bad debt. With bad debt, you’re borrowing money for something that won’t appreciate in value. In fact, it might cost you more money than you ever dreamed possible. For example, credit card debt is bad debt. Very bad debt. You pay interest on your balances and often end up paying a lot more for your purchases than you ever intended to.
There’s no anticipation that your new leather boots will appreciate, right? And you know that fancy Mac computer you just bought will be outdated in a year (well, the way technology progresses, maybe less than a year).
Another bad debt is a car loan. Every year, your car decreases in value. If you have an accident, then you lose value even more quickly.
So the point is this: If you have bad debt, like credit card debt, don’t shove it into the background while you focus on what you consider to be more important debt.
Make your bond payment and your student loan payment on time, of course. But throw your extra money at the bad debt first.
Look out for our next article with more advice on how to stop making debt mistakes.
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