Debt in and of itself is not a bad thing. Debt allows you to do things you otherwise normally could not do, such as start a business, go to college, or pay for a home. Debt constructs buildings and funds investments and entire corporations -- even the government is funded by debt. The trick is to foster debts that help the cause and banish the ones that don't. Not all debts are bad debts.
Debt that helps you, enriches your life, is manageable, and is not a burden can be called good debt. For example, student loans are good debt if they enabled you to get through school and further your life goals. They are bad debt if you dropped out of medical school after one year to become a writer. A good debt helps; a bad debt hinders. We want to help you get rid of that bad debt.
Other examples of debt that may be considered good include:
#1 Home loans. A mortgage can be a great debt. Not only does it permit you to own your own home, but it also allows you to build home equity. It is an asset. People who are financially savvy earn interest and equity.
People who are not financially savvy pay interest and create money for others. For example, charging groceries means that you will pay about 17 percent interest on items that will be consumed within a week. A financially literate person would never do that.
#2 Car loans. A car loan can be a fine debt because you get something long-lasting out of the debt. If you need a nice car for your job (if you are a real estate agent, for example), a car loan may be considered good debt because it helps you in your career. However, a car loan that you cannot afford is a bad debt because it detracts from your life.
#3 Business loans. If you can service the loan, and it helps you make more money, the loan is good debt, but if the loan is nothing but a source of problems for you, the debt is bad.
#4 Credit cards. Credit cards are fantastic. They are convenient and easy. They can help finance a business or even medical emergencies. The problem with them is that it is too easy to fall under their siren spell and get in over your head before you know it. That's when they begin to hurt your life more than help it.
Of course, if you want to prosper financially, there are plenty of debts that you will want to wipe out. The most obvious are those where you are paying high interest and penalties, things such as credit cards, lines of credit, taxes, or any other debt that is much higher than inflation.
You will need to formulate a plan that will enable you to get out from under these burdensome debts. But as you contemplate this plan, you also need to prioritize certain debts and pay them on time:
- Rent or mortgage. Make paying your rent or mortgage a top priority. Payments on a home equity line of credit or second mortgage are also essential because you can lose your house if you don't pay.
- Car payments. Make the payments. If you don't, the car will be repossessed.
- Utility bills. These services are important, and the bills usually have heavy late payment penalties.
- Child support or alimony. Not paying these debts can land you in jail.
- Taxes. Taxes may be put off for awhile if necessary, and we show you how to do so later on in the book, but if the IRS is about to take your paycheck, bank account, house, or other property, you should set up a repayment plan immediately.
