Can Debt be a Good Thing?

Many Americans are consumed with anxiety and frustration over the debt that they owe, and the lack of funds to pay it off. Furthermore, most people struggle to save a cushion of three to six months’ worth of living expenses in case of an emergency – much less invest for the future. So, what is a hard worker like you supposed to do to stay above water and put some money away at the same time?

HOW MUCH DEBT IS TOO MUCH DEBT?

Debt isn’t necessarily bad, but too much debt is. Add up what you pay monthly in car loans, student loans, credit card bills, personal loans—everything but your mortgage. Divide that total by the money you bring home each month. The result is your “debt ratio.” Try to keep that ratio to 10 percent or less. Total mortgage and non-mortgage debt should be no more than 36 percent of your take-home pay.

WHAT’S THE DIFFERENCE BETWEEN “GOOD DEBT” AND “BAD DEBT”?

Good debt is debt that provides a financial payoff. Borrowing money to buy or remodel a home, pay for a child’s education, advance your career skills or buy a car for getting to work can provide long-term financial benefits. Bad debt is when you borrow for things that don’t provide financial benefits or that don’t last as long as the loan, such as vacations, clothing, furniture or dining out.

DO YOU HAVE DEBT PROBLEMS?

You may have debt problems if one of the following applies to you:

  • You are borrowing to pay off other loans
  • Creditors are calling for payment
  • You’re paying only the minimum on credit cards
  • You’re maxing out credit cards
  • You’re borrowing to pay regular bills or you’re being turned down for credit

WHAT CAN YOU DO?

It’s easier than you think if you enforce some self-discipline and have confidence in your abilities. In fact, you could make some major strides in your financial status in as little as six months, if you take these proactive steps toward greater financial standing.

  1. Track Your Spending
    • Create a balance sheet and list your debts in order from highest to lowest interest rate. Keep track of your typical expenses for each month, while also accounting for unexpected expenses for the entire year. Then, add up your liquid assets, including money in savings and investment accounts. Also list any major purchases that you will need to make in the next year. Subtract this amount from your liquid assets. The remainder will be what you have available to pay off your debts. If you have a deficit, you will need to trim your expenses.
  1. Build Money in Savings
    • Link your savings and checking account with an ATM card. Then, set up three savings accounts – one for emergencies, one for unexpected expenses (car repairs, medical bills, etc.) and one for investments.
    • When you receive a paycheck, place only what you need for the month into your checking account. The rest of the funds should be placed into your three savings accounts.
    • If possible, put money equaling one month’s expenses into the savings account for unexpected expenses. Then, if you need new brakes unexpectedly, you will have the money saved already, and will be less likely to charge the expense.
  1. Reduce Your Debt
    • Pay off your highest interest credit card debt first. Pay as much as you can each month— avoid paying just the minimum payment. Since credit card companies make their money from interest payments, the minimum balance payments are set extremely low on purpose. If you can afford to pay more than the minimum, you will pay far less in the long run.
    • Transfer outstanding balances to credit cards with lower interest rates. Or, contact your credit card company and see if they will match the interest rate of another company so that they won’t lose you as a customer.
    • Cancel old credit cards so you are not tempted to use them.
    • Contact the National Foundation for Credit Counseling to develop a structured debt payment plan at 800-388-2227 or at nfcc.org.

If you are in severe debt, a credit counseling service can help you set up a plan to work with your creditors and reduce your debts, or you can work directly with your creditors to try to work out payment arrangements. Check your benefits package at work to see if you have access to credit counseling through your Employee Assistance Program (EAP).

Your debt problem will not go away immediately, but you do have the power to make it better over time. If you combine these debt reducing and savings strategies, you will be more financially secure in the future and well on your way to becoming financially strong.

If your group is looking for more educational resources about financial wellness, or would like to discuss adding a financial wellness plan to your employee benefits package, contact us to speak to a consultant.