Although an argument can be made that no debt is good debt, there are times when taking on a debt can be justified.
What Is the Difference Between Good and Bad Debt
Although debt is never a good thing, it can often be the only way for us to afford a house or sending kids to college. While it’s easy to differentiate extremes, life is rarely black and white and some debts are harder to classify.
Let’s define good debt as a debt that has the potential to enhance your life in an important way. This kind of debt is usually for education, starting your own business and getting a home.
In that case, bad debt can be considered as any debt that is taken carelessly for a short-term benefit that will fade away quickly and therefore doesn’t hold any value or won’t generate an income. It could be a debt you take to buy an expensive car, clothes and consumables.
However, determining whether a debt is good or bad sometimes depends on an individual’s financial situation, including how much you can afford to lose. Certain types of debt can be good for some and bad for others. For example, borrowing to pay off debt through a debt consolidation can be the solution for someone to get out of debt and save money through lower interest payments. If a savvy investor borrows money to invest isn’t the same as when an inexperienced investor who cannot afford to lose does the same thing.
Steps To Avoid Bad Debt
Now that we know what bad debt is, let’s make sure you avoid it at all costs. First of all, it’s important to note that no one wants to be in debt, it’s just one of those things that happens and makes you feel as if it’s out of your control.
Don’t play with credit cards
If you can’t pay for something in cash, you can’t afford it with a card.
Have an emergency fund
Unexpected events are a part of life and an unexpected event can push you into debt in a blink of an eye. An emergency fund is your financial cushion.
Prioritize needs
You can live without wants and there’s always room to cut them. It’s pretty straight forward: the more you shave away the wants and spend only on the needs the better your finances will be.
A budget makes everything better
Your budget is your spoonful of sugar. It allows you to see where your money is going, what can you afford and quickly identify ways where you can save money. In times of crisis, budget is your go-to-tool that will serve as a roadmap to finding a solution.
Best Way To Pay of Debt
If you are already in debt, rest assured you are not alone and there’s no need to feel ashamed. But, you need to get back on your horse ASAP and jump-start your debt repayment journey.
Assess your position
Having a clear understanding of the number you owe will empower you to make a repayment plan that actually works. After facing your reality, it’s much more about changing your mindset and habits than about actual figures.
Prioritize debt repayments
Your debt repayments go under your basic needs. Once you pay off debt, you’ll feel like you can breathe again and breathing is a basic need. That debt is keeping you from achieving your other life goals so liberating yourself from it must become your priority.
Find ways to save money
You need to ensure you are getting the best price out there for everything you need to pay for. Price shopping applies for internet and insurance providers, electric companies in Houston, and groceries. Use coupons and shop on sales- but only what you would get either way. Make your meal plan around discounted ingredients. Look for ways to have fun for free.
Celebrate small wins
Set mini goals to avoid getting discouraged as you can eat the elephant only one piece at the time. Make sure you celebrate your debt repayment victories to get a glimpse of how freedom will feel like to keep yourself motivated. It can be as simple as getting ice cream with your loved one.
Takeaway – Getting out of debt is a journey and like every journey, it begins by taking a first step. Remember that with every payment you make, you’re one step closer to debt freedom.
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