Hello friends, it’s been awhile since I make a post entry. Today I’m going to share something about ‘Debt’ which might caught your attentions. Debt is something which referring thing as ‘owed’ when referencing assets and meant of using purchasing power in the present before a summation has been earned.
Well said and done – this is common knowledge that almost everyone are in debt now day’s. It’s like something that can’t be avoided even by the rich one – Honestly!! Even the wealth and noble people can’t avoid the temptation of having ‘some’ debt.
Before moving forward with all this debt things, let me share a few basic things:
1. World population are loaded with credit-card debt.
Base on statistic – Average American household with at least one credit cad has nearly $10,700 in one (according to CardWeb.com) not to mention other countries.
2. Some debt are good.
Borrowing for home or collage usually makes good sense – just make sure you don’t borrow more that what in need and shop around for the best rates (money management).
3. Some debt are bad.
Credit card is one of the most bad debt it might be (If you misuse it. Stop using it for things that consume quickly.
4. Get a handle on our spending
Always write down what we spend monthly (except you someone in the level of millionaire or above – which mean you don’t need to read this). Cut back thing’s that in need and save the extra or use it to reduce more debt quickly.
5. Pay off your highest-rate debts first.
The key to getting out of debt efficiently is first to pay down the balances of loans or credit cards that charge the most interest while paying at least the minimum due on all your other debt. Once the high-interest debt is paid down, tackle the next highest, and so on.
6. Don’t fall into the minimum trap.
Always try to make it fix but higher than the minimum rate, especially when paying credit card debt. It will take you years to pay off your balance, and potentially you’ll end up spending thousands of dollars more than the original amount you charged.
7. Expect the unexpected.
Standby for the unexpected – Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don’t have an emergency fund, a broken furnace or damaged car can seriously upset your finances.
8. Don’t be so quick to pay down your mortgage.
Don’t pour all your cash into paying off a mortgage if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate and you want to lower your monthly payments, consider refinancing.)
9. Get help as soon as you need it.
If you have more debt than you can manage, get help before your debt breaks your back. There are reputable debt counseling agencies that may be able to consolidate your debt and assist you in better managing your finances. But there are also a lot of disreputable agencies out there.
The beauties of ugly side of Debt.
Sometimes it makes sense to borrow, especially when we know where the road’s end. It’s almost impossible to live debt-free!!
Expert said that, it is crucial to make sure our monthly long-term debt payment should not exceed 36% of our gross monthly income (which one metric mortgage bankers consider when accessing the creditworthiness of potential borrower…
Avoiding debt at any cost means nothing if by force it might depleting our reserve cash for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money you do borrow.
Good debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.
Bad debt includes debt you’ve taken on for things you don’t need and can’t afford. The worst form of debt is credit-card debt, since it usually carries the highest interest rates.
Sometimes the decision to borrow doesn’t hinge on how much cash you have but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you’ll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you’ll pay in interest on a loan, borrowing a small amount at a low rate may make sense.
Great example of Good Debt.
Debt is not that bad or evil when we know what to do and emphasize it on crucial need. In fact, there are instances where leveraging things toward it optimum power will help in improving a better overall financial position. I’ll focus on three things – Home, school and car.
1. Home loan/ buying a house.
Debt of a home loan is something. Talking about paying a new home in cash is slim – rather impossible for most people. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you’ll owe and the less you’ll pay in interest over time.
Although it may seem logical to plunk down every available dime to cut your interest payments, it’s not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning.
Never put your cash into a home if you running with other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate, you can always refinance later if rates fall. Use our calculator to determine how much you might save.)
2. Paying for college.
Things about paying for your children’s education are best when implementing their study – their own loan (which in Malaysia, we have PTPTN) rather than us (parent – if you are!!) liquidating or borrowing against our retirement fund. That’s because our kids have plenty of financial sources to draw on for college, but no one is going to give us a scholarship for our retirement.
It’s also unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.
Your best bet is to save what you can for your kids’ educations without compromising your own financial health. Then let your kids borrow what you can’t provide, especially if they are eligible for a government-backed loans, which are based on need. Such loans have guaranteed low rates; no interest payments are due until after graduation; and interest paid is tax-deductible under certain circumstances.
3. Financing cars
Financing a car is something easy when you know what to do – how long you plan to keep it!! Remember since car’s value plummets as soon as you drive it on the road. It also depends on how much cash you have on hand.
If you can pay for the car outright, it makes sense to do so if you plan to keep the car until it dies or for longer than the term of a high-interest car loan or pricey lease. It’s also smart to use cash if that money is unlikely to earn more invested than what you would pay in loan interest.
Most people, however, can’t afford to put down 100 percent. So the goal is to put down as much as possible without jeopardizing your other financial goals and emergency fund. Typically, you won’t be able to get a car loan without putting down at least 10 percent. A loan makes most sense if you want to buy a new car and plan to keep driving it long after your loan payments have stopped. And be sure you can pay it off while you still have the car since it’s painful to pay for something that has been consigned to the junkyard.
Leasing a car might be your best bet if the following applies: you want a new car every three or four years; you want to avoid a down payment of 10 percent to 20 percent; you don’t drive more than the 15,000 miles a year allowed in most leases; and you keep your vehicle in good condition so that you avoid end-of-lease penalties.
Whatever route you choose, shop for the best deals. Remember, it’s in the car dealer’s best interest to finance at the highest rate possible, so look at what you’ll pay overall, not just the monthly amount. If you tell your car dealer you can spend $400 a month, you could end up with a new car for $400 a month based on an uncompetitive interest rate.
Managing our debt
Make sure that we stick with this simple step – Not our bill in charge!!
Outside our fixed monthly bills, we probably don’t have precise idea on what do our spend went to. If we want to get our debt under control, start by figuring out our spending patterns and identifying unnecessary expenses.
Make our preparation of one moth observation. For one month, write down every cent you spend. Tally the expenses on the list and compare the sum to your monthly income.
Next, make a list of all your debt obligations and the interest you’re charged for each.
Once you’ve done all that, you’re ready to start lightening your debt load.
The basics of debt reduction are simple: Cut down on your variable spending and put the extra money toward your debt payments. Once you determine the maximum amount you can pay off each month, pay down the debt with the highest interest rate first – that usually means your credit-card balance – while paying at least the minimum monthly amount due on all other revolving bills.
Once the debt with the highest rate is wiped out, put your money toward paying the debt with the next-highest rate. One exception: If you have a credit card with a low teaser rate that will go up after a fixed amount of time, strive to eliminate that balance before the low rate expires.
You might also consider moving some of your high-interest credit-card balances to a card with a lower interest rate. But read the fine print on any invitation to transfer balances. Sometimes such low-interest-rate offers are only in effect for short periods of time, after which the rate skyrockets. What’s more, consolidating your debt on one card may lower your credit score if your debt-to-available-credit ratio worsens.
For many people, reining in discretionary spending for a few months goes a long way toward tackling debt. But if that’s not enough, try to reduce your fixed expenses. Take steps to lower your household bills; refinance your mortgage to get a lower interest rate; or, if you have a good payment history, ask your credit- card company to lower the interest rate you’re charged.
p/s: My simple advise – always know where, when and how our financial term stand. Then, make analysis of what crucial toward better saving and investment versus debt. Seek for help and guide from certified advisor. Wish everyone better debt management in the future Daaaaaa