Pay Off Debt: A Short Course In Debt Management
Posted on | May 7, 2009 | No Comments
Feel The Need To Pay Off Debt?
I am not surprised.
It seems that, more and more, many Americans are going much deeper into debt in order to finance a lifestyle that is fraught with consumerism and consumptive spending. Many Americans wake up to find that most of their money goes toward pay off debt. Even though it seems that debt is part of being an adult in the 21st century, it need not be that way.
Frankly, we need to take a lesson from our grandparents and learn to manage our money. Fundamentally, money management means (1) learning to live within our means, and (2) to save rather than finance consumptive or discretionary purchases. If we can just follow these two rules, we can not only pay off our existing debt, but begin to live a lifestyle that does not rely upon borrowing.
Good Debt v. Bad Debt
I want to make a distinction between good debt and bad debt. Good debt is incurred to purchase an asset that increases in value and/or provides a stream of positive cash flow or income to the borrower.
For instance, I own several commercial and residential rental properties. They all are mortgaged. But, the value of the properties exceed the balance on the loan. The rents received are large enough to cover the expenses of ownership as well as the mortgage payments. I put money in my pocket each month. This is an example of good debt.
“Bad” debt is the result of consumptive spending. Consumptive spending involves borrowing to pay for something that either decreases in value , has no value or costs you money each month to own. Cars, clothing, electronics, meals, entertainment and ring tones and i-tunes are all examples of consumptive spending.
Note that I am not saying that this type of spending is bad. I am saying that using borrowed money to finance consumptive spending is bad.
Look….
I understand that debt is often unavoidable for big ticket items such as cars. But, the point I am making is that we should avoid, or minimize, the level of consumer debt that we incur whenever possible.
People that carry large balances on several credit cards in addition to a large car loan and mortgage often find that these multiple debts suck up all of their disposable income and cause them to risk bankruptcy.
The good news is that I will teach you how to avoid the debt trap (or dig your way out of it) with some tips and exercises. In the meantime, get a piece of paper (or preferably a spreadsheet) and figure out how much you owe.
Tomorrow, we will calculate whether or not you are too deep in debt.
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