Understanding Debt

Good Debt

1. Borrowing money for education

When you take on a student loan, you are rarely making a bad decision. Just make sure you are taking the right degree for you as coming out without the degree and still the debt is not a good outcome. Generally, those with university degrees tend to earn more money over their lifetime than those without a degree.

2. Borrowing to buy a house

Value builders are assets that are likely to hold their value, grow in value or bring in income after we’ve paid for them. So they can be OK to go into debt for. A house is the classic value builder (although houses can lose value, too).As a rule, if we keep a house for the long term (more than 10 years) the value will increase or stay about the same. And, if we needed to, we could sell the house and pay back our debt.

3. Purchasing a car

If public transportation is not available in your area, or you cannot find anyone with whom to carpool, you are probably going to need to buy a car. A car loan can fall into that gray area between “good” and “bad,” debt but the key to keeping an auto loan closer to good debt rather than bad is to make sure you get the lowest possible interest rate on your loan. Also, it’s important to put as much down as possible, while making sure you still have cash on hand should you need it. Your best bet is to buy a late-model used car rather than a brand new one, potentially saving you thousands on the advertised price and the interest paid over the life of the loan.

4. Business loans

While this wouldn’t be considered good debt in every single case, borrowing money to start or expand a business is generally seen as a good idea, especially if business is booming. After all, it takes money to make money, right? Sometimes you have to borrow capital in order to hire new employees, buy new equipment, pay for advertising, or just to manufacture the first run of a new widget you invented. As long as the money is borrowed with a plan in place to generate more business or income, then taking out a business loan counts as good debt.

Bad Debt

1. Free up cash for repayments

You may not feel there’s room in your budget to make larger payments, but if you’re serious about being debt-free, you’ve got to make some changes. To free up cash to pay down your debt, you must try to cut your costs, increase your income, or both.

Reduce your expenses

Do a personal budget and review your monthly expenses. Identify where you can cut costs. Look carefully at the following areas:

Utility bills: Gas and electric are especially important. Adjust your thermostat, turn off office equipment when you’re not home, lower your water heater thermostat. Wash your clothes with cold water rather than hot, and line-dry them instead of using your dryer. Only run your dishwasher when it’s completely full, or opt to wash dishes by hand. Txt and skype rather than make phone calls.

Subscriptions and miscellaneous fees: Cut any subscriptions and fees that are not essential. Be sure to check app subscriptions as the number that you have can mount up over time.

Eating out: Dining out or going out for drinks can add up quickly. Eat more meals at home, and host gatherings at your house rather than at cafes and bars.

Purchases: You don’t have to stop all purchases, but you can be more strategic about when and how you splurge. Set up a splurge account and only buy when there is money to spend. Look at your spending on clothing, accessories, electronics, hobbies, and entertainment. Before you pull the trigger on any item, ask yourself, “Do I really need to make this purchase, or can I get by without it?” If it’s not something you truly need, don’t buy.

Hopefully, you can find enough excess in your personal budget that you can cut down on expenses and still maintain your current lifestyle. If you find it’s not that easy, you may need to take more drastic measures. Taking on a flat mate or moving to a shared living situation can easily save you hundreds of dollars on housing expenses. If you live in a bikeable area with a good public transport system, or if your significant other has a reliable vehicle, ditching your car can save a ton on gas, maintenance, repairs, insurance premiums, registration, and loan payments. Remember, it’s only temporary until you’re debt-free.

Increase your income

If you’ve got some free time you can increase your take-home income by making money on the side. Here are some ways to make extra cash:

1. Downsize and declutter: sell your unwanted stuff
2. Freelance writing: sell your words
3. Classes: sell your knowledge
4. Bed and Breakfast: sell space in your home
5. Farmers’ Market: sell your produce and gourmet foods
6. Crafts and art: sell your creativity
7. Call centers: sell your time and voice
8. Sewing and alterations: sell your handiwork
9. Used book sales: sell your old paperbacks
10. Consulting: sell your knowledge
11. Medical transcription: sell your computer skills
12. Do odd jobs

For more ideas: https://www.moneycrashers.com/ways-make-money-from-home/ Written for the American market but quite comprehensive, with lots of ideas and detailed instructions on how to set yourself up.

2. Budget for debt repayment

Budgeting is no one’s favorite pastime, but you’ve got to create a realistic debt management plan. Write down your monthly net income and subtract your budgeted expenses from that number. Based on this calculation, designate a specific dollar amount you can use to pay your student debt balance each month. Be sure to leave a little wriggle room in your budget for fluctuations and emergencies. For example, if you have $600 remaining after meeting your budget obligations, consider designating $400 to debt payments and leaving a $200 buffer for unexpected expenses. As you continue to make payments, your minimum monthly obligations decrease. Don’t be tempted to decrease your actual payment when this happens, as paying only the minimum won’t make a serious dent in your principal balance. Making higher payments can save you thousands in interest and can mean you’re debt-free years – or even decades – sooner.

Debt Consolidation

Debt consolidation entails consolidating multiple sources of debt – such as multiple credit cards, student loans, auto loans, and mortgages – into one loan. The biggest benefit of debt consolidation is that it simplifies your obligations. You’re only responsible for one payment every month, so you’re less likely to forget a payment and get hit with late fees. You may also be able to reduce your total monthly payment for all your obligations by agreeing to a long-term loan.

Set your repayment schedule

Once you’ve determined how much you can allocate toward debt repayment and you know your interest rates, decide how you’re going to pay off the debt. Pay debt with the highest interest first.

Stop the cycle of debt

The last thing you want is to successfully pay down your debt, only to find yourself in debt again months or years later, for example having a credit card debt. Change the way you handle your finances and the way you think about money in order to keep yourself out of trouble.

3. Use cash only for non-essentials

Leave your credit card at home. To use the envelope budgeting method, pull out a certain amount of cash each month and stick it in an envelope. Use that instead of your credit card for non-essential purchases. When the money’s gone, you’re done for the month. If any cash is left over, you can put it toward your credit card repayment or deposit it in your emergency fund.

4. Track your progress

It’s easy to lose motivation when you’re dealing with a large debt. Tracking your progress is one way to keep yourself excited and focused on what you’re accomplishing.

5. Stay accountable

Find an accountability buddy and keep each other up to date on your financial progress. This could be a significant other, close friend, or family member. Talk on a regular basis – maybe once a month or every two months – about what repayments you’ve made on your credit cards.