Credit

We All Owe and We Can Use Debt Wisely

May 9, 2007 / Comments Off on We All Owe and We Can Use Debt Wisely

Our country is drowning in debt and most of us are, too. Why is that?

Well let’s look at the facts. Our federal government is $8.8 trillion (that’s no typo) in debt.* Debt payments for the rest of us rose to record levels last year. In the second quarter of 2006, families had to spend 14.4 percent of their disposable income to service their debt—the largest share since 1980*, and it’s no secret that bankruptcies and foreclosures are on the rise. So what do we do? The media would like us to think that we are just bad consumers paying too much money for designer jeans, BMWs, and the latest iPod. But the reality is that most people get in debt because something came up that they didn’t have the funds for – something like your medical insurance premiums just went up 50% or you got laid off from your job or your adjustable rate has now adjusted to sky high levels.

Credit isn’t horrible if you use it and manage it well- it can actually help you build wealth. Here are 8 tips to help you:

  1. Make sure you have enough cash reserves to handle a lay off or a car repair, etc. At least a minimum of three months gross salary is what I recommend; more if you have a lot of assets or debt. I personally keep a minimum of six months salary in cash reserves at a high paying money market account like www.VirtualBank.com.
  2. Keep your credit score high and up to date. You have to have credit in order to get it, and a high score is a good thing. Find out your score and get a free annual credit check at www.AnnualCreditReport.com. I buy stuff on-line all the time so I make a point of checking my credit to look for any unusual purchases that aren’t mine.
  3. Take out debt for things that can appreciate like your business or your home not your car or snowboard. Pay cash for the car, use public transportation, or use a local service like www.CarSharing.net.
  4. When the going gets tough, the tough go to Mom and Dad (or Auntie Fern). Make sure that your parents, friends or relatives feel good about lending you money by having the loan structured by an organization such as www.CircleLending.com. Remember, you are not a loser. You just need some financial help. So set it up right so there are no misunderstandings.
  5. Take on debt to invest in your most precious asset – you. Your income needs to constantly grow in order to keep up with taxes and inflation. Don’t be afraid to take out a loan for classes that will improve your job skills and get you more bucks. I take on-line classes all the time. It’s much better that TV and more fun than the local bar. I get to learn new stuff and meet interesting people from all over the world.
  6. If you are in over your head, help is on the way. Check out the National Foundation for Credit Counseling (www.nfcc.org) and the Association of Independent Consumer Credit Counseling (www.aiccca.org). Members of these two organizations do not employ commission-based counselors and are more highly regarded than some of the other organizations.
  7. People often overlook credit unions. They usually have lower interest rates on loans for members and are more willing to work with people with bad credit than the local bank.
  8. Don’t worry about real estate debt. Keep it manageable but keep it. It is usually your biggest tax deduction. That old school garbage about paying it off the and living debt free – forget about it! Most retirement plans will distribute money that is all taxable. If you paid off your entire mortgage then you could find yourself paying more in taxes than you did when you were working.

Keep in mind that almost every big purchase that you will make in your life – your home, your car, your loans, your investments – may involve a commission salesperson. So it pays to be skeptical and cautious. Your girlfriend’s brother may say he will give you a good rate on a mortgage, but when it comes to feeding his family or yours, guess who is going to come first? It’s a good idea to always ask what the other party will make in fees and commissions. If they are good business people, they will have nothing to hide and be glad to disclose how much they have to gain. The old adage – “if it sounds too good to be true, it usually is” – still applies. Take your time, take a deep breath and use your intelligence to make the right decision for yourself. It will pay off.