Debt to many Americans is a way of life. There are plenty of people with opinions about debt on whether you should have it or not. The important thing to understand is yourself and how much you can earn every year. What are your career and life aspirations? Not only is it important to know what to do for a career whether it is a labor job, technical job, or a job that requires you to go to college, it is important to know how much money you need for the fun you have in your life. Knowing how much money you need month to month will help you determine how much debt you should take on. Here is a little more of a breakdown on debt that is good and bad to help you answer these questions.
Clarifying What Debt Means
Debt is anytime you borrow money from any professional institution where you sign a contract and have to pay it back. There are interest rates applied to the actual money you borrow. You then have to pay the money you borrowed back plus the amount of the interest your loan accrues while you own the loan. You can borrow money from family and friends and it is still debt. The problem with borrowing money from family friends is that it can cause trouble. If you can enter into an agreement and draw up a contract, that is the best way to borrow from family and friends. Most of the time you will borrow money from a professional organization like a bank, credit union, or organization like the VA. You always want to get the best possible interest rate. You want to be aware of all the fees and terms of your loans. Pay a lawyer if you have to explain all the fine print, so you do not get caught with a bad loan.
“It takes money to make money”. So there are very good reasons to be in debt when the debt is going to save you money in the long run or make you money. Good debt examples are mortgages. Buying a house at a reasonable price to give you a low mortgage payment will help you fight inflation and rising costs of housing over the years. In thirty years, if you are able to pay off your house, then your monthly house expenses will be greatly reduced.
If you have an excellent idea for a business, you can sometimes get a loan to start the business. You can then pay off the loan over time and then live off the profit of the business as long as it is open and successful. If you can find a good used car and come up with some cash up front, getting a small auto loan is okay. You, of course, have to get to work somehow. Always be leery of buying new cars unless you make a lot of money. Even then it is better to get a sensible car and pay it off as soon as possible. Car loans can end up being bad sometimes.
Bad debt can be defined in several ways. Just like with the auto loan or business loan, the loan can outlast the price of the car or business. If you are not successful in your business, you can then owe on that loan and not be making any money. This is why it is best to get an LLC. or make your business corporations in order to protect you from having this kind of debt.
Too much credit card debt is bad. You want to have a maximum of three credit cards for a good credit rating. The best thing is to pay off the credit cards every time you use them. Many people use credit cards to buy things they can not afford, this is bad debt. You should always use credit cards for emergencies and then pay them off immediately. The reason credit card debt is bad is because you are paying the highest interest for borrowing money on a credit card. The best thing is to live without whatever it is you want to put on the credit card. If you have a credit card that has no annual fee or a low annual fee and if it pays you back when you use it, it could be okay. The most important thing is to pay the credit card off every month. You also only want to use the credit card for what you spend out of your paycheck if you did not have a credit card. Nothing else.
Having debt is okay when it is for a good reason. When you have debt and show you are good at paying your monthly payments, this gives you a good credit score. Debt has to do with self-control. Do not have delusions about your life and try to spend more than you make. Be who you are and make a good life with the money you make right now.