Slaying the Debt Dragon

We all accumulate debt at some point in our life. There is really no way around it. Especially when we consider the two greatest costs we will face – buying a home and funding our education. Thus, it is good to accept the fact that debt is not a complete negative and if used wisely can be a great asset.

First of all let’s consider what we should or should not use debt for. Using debt to purchase a home (a mortgage) and fund your education is always recommended. The reason it is recommended is because both of these expenditures are actually investments. It’s considered “good debt.” Hopefully, what you invest in your education will pay dividends later in terms of higher salary and increased job prospects. Buying a house is usually one of the most stable and beneficial investments you can make considering that real estate is pretty stationary and the other alternative is to rent and build no equity. Therefore these two investments are the first two to consider when acquiring debt.

There are other positive times in which to incur debt. One such time is to invest in a business or some other income producing activity. The key in determining whether it is a good decision is to look at the income potential or what effect it will have on your long-term financial picture. If the money you are spending is likely to make you more money in the long term then it is probably a wise investment.

Of course it is not the positive debt that most of us incur. Usually it is of the negative variety. Negative debt is any debt used to buy short-term consumer goods such as clothing, entertainment, electronics, etc. All of these items have a very short life span and usually have no value when we decide to sell them. Therefore the money we spend on them is really money that we can never get back. But the fact is most people end up financing purchases for televisions, stereos and computers. It would be best to make these purchases in cash.

A vehicle is another thing that many people accumulate debt for. Though it is something that you will probably lose money on, it is also something that most people cannot afford to pay cash for. Therefore this is a debt that most of us have to incur. It does help to take a look at the resale value of the car you are looking to buy to determine how much money you are likely to get back when you decide to sell the vehicle. This can be the difference between a poor investment and one that allows you to recoup some of your money spent.

One important aspect of debt that most people neglect is simple record keeping. You should have a file created in which you keep careful track of all debt you accumulate along with an idealized payoff plan. If you can simply do this you will have more control over your debt than the average consumer. Record keeping is the first step toward controlling your finances and it applies to debt as well as it does to investments.

Steps for Reducing Credit Card Debt

Find the low interest rate cards. Take a look at all the credit cards you have, and try to shift the debt to the card charging the lowest rate of interest. Also, as you get new credit card offers, don’t accept any unless they offer lower rates. Shift as much debt to the low interest cards as possible, and consolidate your credit cards. As always, check the fine print to make sure the interest rate lasts for a long time, and is not just a teaser rate that lasts a few months. Also, searching online is a great way to help find credit card companies with the best rates. When you go to switch to the new cards, let your old credit card company know first — they might give you a better rate.

Leave your card at home. Instead of taking your credit card with you, leave it at home and use cash instead. That way you will be forced to limit your spending to your pocket cash.

Change credit habits. Stop using credit cards to purchase things if you can’t make the FULL payment at the end of the month. If you can’t afford it, don’t buy it. Even better — change your credit card habits by considering credit cards “emergency only” cards. Credit cards are nice to have if you have a short-term need for cash for emergency purposes.

Reduce your credit limit. If you are going to keep your credit cards, then don’t let your credit limit increase. Credit card companies often will increase your limit, allowing your debt to build. If they increase your limit, just call them back and let them know you don’t want it increased.

Budget your purchases. Setting up and sticking to a budget is a great way to help discipline your money spending habits. By tracking where your money is going, you will be more aware of your spending habits, and eliminate unnecessary spending, and possible debt.

Suze Orman gives great advice on taking control of your debt. Check out her book on being Young, Fabulous, and Broke. And here are 5 more quick tips to reduce your debt.

Debt Management Advice from Money Instructor