Understanding Debt Fundamentals to Become Debt Free
Understanding Debt Fundamentals to Become Debt Free
We have a culture of debt in this country and for many it has become a huge problem in our current economic climate. For years, it was almost a rite of passage to saddle yourself with car payments, mortgage payments, and credit card payments beginning at an early age. While it makes sense in some cases to take on debt, many people who have had the rug pulled out from under them in this recession are rethinking this logic.
For many years, debt was too easy to get in this country and folks lined up to take advantage. Now that we don't have enough jobs to go around, these same people are having a hard time paying off their debt and even losing their homes. Until we change how we think about and manage debt, many more are destined to face this same predictable outcome.
The Right Amount of Debt
When determining a reasonable amount of debt it is generally agreed that no more than 20% of your total annual income should have to go to service debt. However, this is just a guideline and it doesn't work for everyone. The type of debt (mortgage vs. credit cards) should also be considered. In general, if you have so much debt you worry or struggle to make minimum payments, you have too much debt.
In most cases, debt is not good because it increases the cost on everything you buy when you have to pay interest on your purchases. Consumers are often enticed to spend beyond their means due to the easy availability of credit. We've lost the connection to how our purchase decisions affect our total availability of funds. Often we seek immediate satisfaction without regard to the long-term consequences.
Strategic Debt
Under certain circumstances, taking on debt can be a wise strategic choice. Using debt to purchase large items such as a home or car is often the only way to afford them. This kind of debt can be good as long as you only take on as much debt as you can afford and you budget for it. Even then, it's best to pay off long-term debt as quickly as possible.
Another instance when debt purchases make financial sense is when you are able to purchase an item that you would have bought anyway at a significant discount and you have the means to pay it off before you incur any interest. Your primary financial goal however, should always be to reduce your overall debt and ultimately eliminate all but car and home loans.
Managing Debt
While some debt can be useful and even strategic, having too much can quickly overwhelm you and your finances. Just because everyone else is getting in over their heads with debt, doesn't mean you should be too. Debt has the insidious effect of limiting our options in uncertain times. We need to rethink our beliefs about debt and learn healthy ways to control it before it ends up controlling us.
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