|
Research result shows that American households in average are holding $10,000 credit card debt. Thus, most Americans are debtors, not savers. Hence, it is important to understand your debt before you learn how to resolve it and get yourself out of this debt poll.
To learn how to manage your debt, you need to begin with knowing your debts. What are your debts? Are all these good debts that generate positive income or there are bad debts that burden you?
Analyze Your Debt
You won't have debt problem if your incomes are enough to cover the repayment of your debt. Debt-to-Income ratio is a common calculation factor that you can use to determine how serious your debt is. Debt-to-income ratio is the percentage of your income you use to pay your debts. Most banks and financial professionals agree that you should keep your debt-to-income ratio at less than 36 percent of your gross income. To have a better picture on how’s debt-to-income is measured. Take your total income, for example $3,000 multiply by 0.36 (36%) :
$3,000 x 0.36 = $1,080
In this example, your debt payment for each month should not exceed $1,080 in order to keep your financial healthiness. It's a pretty simple formula, and it gives you a quick guideline as to how much of your income is considered a comfortable debt load.
Good Debt Vs Bad Debt
There is good debt, and there is bad debt. Most people had both. Good debt is debt used to purchase an appreciable asset – An asset that will go up in value such as a house, growing your business, or paying for an education. Educational debt is considered good debt because an education helps you further your career and improves your opportunity for a higher salary and a better life. Good debt enables you to build your net worth over time. It also enables you to purchase an asset that would take years of saving to acquire, such as a house.
Bad debt is debt used to pay for consumable purchases such as vacations, food, clothes, and gasoline, on which you proceed to pay only the minimum each month rather than paying the card balance in full each month. There may always be times in our lives when we can’t pay that balance in full each month, but that should be the exception instead of the norm.
Keep Yourself Away From Bad Debt
You should always keep the debt-to-income ratio in mind. Your total personal debt should not exceed 36 percent of your total income. It is also important not to miss payments; missing your debt payment meaning that you are letting a chance for your debt to grow because overdue debt incur interest which will be added into your exiting balance.
When it comes to buying durable goods that won't contribute to wealth generation, Bach offers a basic rule of thumb. "My grandma used to say that if you're going to buy something that doesn't go up in value, and you can't afford to pay cash, then you can't afford it."
Exacerbating the bad debt factor is that people will apply for store credit for the savings offers that say if you open a credit card account today, you can take 10 percent to 20 percent off the cost of your purchase. What people often don't realize is how much of that savings will be destroyed by the high interest rate on the card if they fail to pay for the items immediately.
Build Wealth With Good Debt
The best type of debt is debt that builds wealth over the long run, and the No. 1 example of that is mortgage debt. Statistics show that Home values have increased an average of 6.5 percent a year over the past 30 years. So whey you get a mortgage to buy a home, chances are that’s good debt because mortgage debt creates positive value that help you to build wealth.
You could generate your wealth through other good debts such as investment and new business start up but one thing to keep in mind that a good debt can becomes bad debt if you do not manage it properly.
Page 2 : Top 10 causes of debt
Get Social, Bookmark Us!
