Creating a spending for your emergencies is one of the smartest components to your strategic plan that can be implemented for your household. Avoid applying for personal loans for emergencies, such as using your signature as collateral; generally the interest rates are higher and the cost, excessive. Learn how to judge which debt makes sense and which does not and then wisely manage the money you do borrow.
CNN Money (2012) says “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.” For example, not many people can pay cash for a mortgage purchase or a vehicle loan. My advice would be to pay cash for smaller purchases and avoid credit card purchases altogether, if you are unable to pay them in full each month. The inability to repay could categorize those credit cards as a bad debt and as a result decrease your credit score.
A bad debt includes debt that you acquire that are “wants” such as that tricked out vehicle that you cannot afford or that trip to Brazil or Costa Rica for example. Instead, focus on your needs and choose to drive a vehicle that fits within your budget and take staycation in your local area. As a guideline, your monthly auto payment should not exceed 15% of your income for an annual salary of $12,540 or 13% for income of $69,000 or above.
Good debt could be categorized as a mortgage loan, auto and perhaps student loans. Currently interest rates are very low and these are purchases that some people cannot afford to pay for in cash, as mentioned above. Credit card debt is not a good deal to carry long-term. Make your money work harder for you. If you are paying more interest than the loans you have taken out, you are working for your money; your money is not working for you. Making your payments on time builds your credit score and increases your buying power.
If you must have debt, consider the aforementioned loans and save to pay cash for everything else. I know society dictates that consumers spend and it seems almost impossible to a degree to be completely be without debt; however, it is possible if an individual work very hard, to get there. Invest your time and money wisely and in order to do that, constantly evaluate your situation, educate yourself regularly and take action to improve your financial strategies.
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