In November, I talked about how your cash flow forms the basis of your finances and in December I explored some simple savings strategies. This month, now that the holiday bills are here, I would like to briefly explore the idea of good and bad debt.
Most of us have some debt – it is hard to live without it these days. It is important to understand the kind of debt that we have and how it impacts our net worth. While all debt is a liability, it can be used to increase our net worth. The best example of this is a mortgage as the value of a house or property usually increases. There are still risks however, as it is possible to pay too much for a property and the value can also decline, especially if it is not properly maintained or something unexpected happens to the property. Sink holes in Florida come to mind, or wild fires in California. These events are not always covered by insurance and, thankfully, are rare.
As consumers, we have little to no control over the interest rates we are charged for our debt. If an increased interest rate makes the payment beyond our ability pay, good debt can quickly become bad. This is especially important to keep in mind now that interest rates are rising.
The article, Good debt vs Bad debt, provides a few examples of each type of debt. Do you have more good debt than bad debt? What would happen to your good debt if your payments were to rise? These are a couple of questions to ask yourself.
If you would like help with your cash flow or have questions, please feel free to contact me. I have many resources that may help, including a simple monthly budget planner to help get you started. If you would like a copy of it, I would be happy to send one to you. There is no charge.
Financial Advisor & President