Good Debt vs. Bad Debt
Getting out from under bad debt is necessary if you are hoping to achieve your financial goals. “Good debt” is debt incurred from purchasing appreciating assets. Assets such as a house and investments. “Bad debt” is debt incurred from purchasing depreciating assets. Assets such as a brand-new car, clothes, furniture (except for antiques), electronics.
How To Get Out From Under “Bad” Debt
Revolving debt such as debt on credit cards and lines of credit can be a debt trap for some, who never end up paying them off.
Here are some ways to pay off your debt.
· Target one card at a time - the one with the highest interest.
· Negotiate with your creditors for a lower interest rate & transfer your balance (cautiously).
· Make two payments each month instead of one.
· Stop using your credit card.
· Seek credit counseling.
· Consolidate debt into one with a lower interest.
· Buy what you need, not what you want because what you want is to be free of debt.
High levels of debt causes worry. Decide you want to live a guilt and worry-free life and pay off your debt.
Credit Card Debt!
John and Jane
John and Jane both have $2,000 owing on their credit cards.
Both cards require a minimum payment of 3% or $10, whichever is higher.
Both are short on cash, but Jane manages to double her payment to $20 while John pays the minimum.
The interest rate on both cards is 20% on the outstanding balance.
This means that part of the payment goes toward the balance and part goes toward interest on that balance.
Here is the breakdown of the numbers for the first month of credit card debt:
John Pays the minimum only
● Principal: $2,000
● Interest: $33.33 ($2,000 x (1+20%/12))
● Payment: $60 (3% of remaining balance)
● Principal Repayment: $26.67
● Remaining Balance: $1,973.33 ($2,000 - $26.67)
These calculations are done every month until the credit card is paid off.
In the end, John pays $4,240 in total over 15 years for the $2,000 in credit card debt.
The interest alone over the 15 years’ totals $2,240.
Because Jane paid an extra $10 a month, she pays a total $3,276 over seven years for the$2,000 in credit card debt.
Jane pays a total $1,276 in interest. The extra $10 a month saves Jane almost $1,000 and cuts her repayment period by more than seven years!
The lesson here is that paying twice your minimum or more can drastically cut down the time it takes to pay off the balance, which leads to lower interest charges. People with a high net worth are not necessarily those with high incomes.
Building Your Net Worth
High net worth individuals are people who saved a lot more than they spent. Managing your money means making wise decisions with how you spend your income. And creating healthy financial habits, which includes eliminating debt on depreciating assets.
It doesn’t mean saving every penny because I have met elderly high net worth clients who regret that they had had not spent more money doing what they loved while they were young, when they had the health to do so.
The issue is not to be borrowing in order to live the life we want. Debt robs you of your future. Save, invest and pay for the life you want.
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Jennifer Thompson has been working in banking and finance for over twenty years. She can be reached at jenniferthompson@compelling365.com
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