March 12, 2010, Newsletter Issue #121: The Right Mix of Debt

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Before hitting the brink of bankruptcy, it is important to get real with yourself, and understand what kind of debts you have. Unfortunately, the amount of personal debt in this country is ever growing, and that is due in large part to the ease in which credit can be obtained. Debt is the ugly side of the credit coin. There is no secret to understanding your spending habits. If you can pay cash for something, in most cases you can afford it. If you find yourself always reaching for plastic, chances are you canít afford it.

When you make purchases on a credit card for items that you know that you would not ordinarily be able to afford, that is an example of bad debt. Putting that flat screen T.V. on your store card, is also an example of bad debt. Essentially if you are borrowing to pay for your lifestyle, that is bad debt.

So what is good debt? Good debt is an investment that at the end of the day will create value. For example, student loans are considered good debt. Some of you may argue otherwise, but a student loan is an investment in your education. As a result of your college education, you earned a degree that would lead you to a better paying job or profession. Another example of good debt is the purchase of your home as a primary residence. This is a good investment, because homes typically appreciate over time. Unfortunately many people were swept up in the housing boom of a couple of years ago, and purchased homes as investments. Purchasing a home as an investment tool, is almost as bad as having bad debt. So its important to be able to draw a distinction between what is considered good debt, and what is considered bad debt.

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