Yes. We are back at it again with debt. Why? Because as you go through different phases of life, things have different meanings. Debt in your twenties should have been significantly different than debt in your thirties. You likely had student loan debt, maybe you were even carrying a credit card balance from month to month. Heck, you still may be carrying a credit card balance from month to month.
Going into your thirties, your student loan payments should be coming to an end (assuming you’re on standard repayment). Maybe you’re buying your first home and you’re financing the purchase
Don’t carry a credit card balance
Did you know that revolving debt, i.e. credit card debt, is meant to be paid off in full every month? Credit cards are intended to be a tool, to earn points or rewards, for common purchases that we make. They have slowly become this manipulative beast that has taught us to prioritize short-term gratification over long-term consequences.
Do you struggle to pay off your credit card balance in full each month? Cut the bad habits once and for all. Stop using them altogether if you have an unhealthy relationship with credit and commit to getting on a debt repayment plan.
“Understand that the credit card preys on human behavior. Those card companies understand us very, very well. They reinforce bad behavior.”Clark Randall, CFP(R)
Understand the basics of a mortgage
Mortgages are COMPLEX. The amount of paperwork you have to sign alone… my goodness. While I don’t expect you to know the ins and outs of the Fair Housing Act, it’s important to know the components of a mortgage.
- Know how much you truly can afford based on what works with your budget. When you get pre approved, you’re going to get a loan amount based on what the bank thinks you can afford. The bank does not take into consideration your personal spending. It’s important to run the numbers and make a rational and informed decision about how much you can truly afford
- Understand the impact of making less than a 20% down payment. This typically means adding Private Mortgage Insurance to your monthly payments, insurance you pay to protect the lender. This adds to your monthly affordability costs, and means you’re going to pay a lot more in interest (higher loan balance = more interest paid).
- Consider interest rates.
Mortgages have traditionally been considered good debt. Historically, the appreciation in home values outweighed the cost of a loan. But as time has gone on, consumers are taking on more mortgage than they can afford, turning good debt into bad debt.
Understand good debt versus bad debt
A hot topic in the personal finance industry: is there good debt vs, bad debt? My favorite answer, “that depends”.
Debt is considered “good” if the benefit of taking on the debt outweighs the cost.
- Going to college and taking out student loans to earn a degree that will help you get into a career where you earn 1x more per year in salary than the cost of your student loans
- Taking on a mortgage for a home that will increase in value, ultimately building equity, at a greater rate than the cost of the loan.
Debt is considered bad when it is taken on to purchase something that will likely lose value:
- Credit cards
- Auto loans
- Personal loans (if used for discretionary spending or nonessentials)
Be mindful of your behaviors
- Don’t take on debt without education yourself first. We so often make emotional decisions about spending that end up having a negative impact on our finances.
- If you have an unhealthy relationship with credit, it’s time to stop once and for all. STOP using your credit cards to make purchases. As I mentioned in a previous post, if you can’t afford to pay cash (or use your debit card), then you can’t afford it at all. It’s not always easy, but we have to be honest with ourselves.
- Don’t shame yourself. You are not alone. The average household with a credit card, carries a balance of approximately $8,900. Understand what is triggering your spending habits and commit to positive change.
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”CC
Carolyn Rowland is in the Milwaukee WI, area.