Welcome to my series, How To Use Money To Make You Happier.
In the introduction section, I gave some stats and mentioned a few reasons for starting this series.
I am going to break this series into a couple of steps:
- Introduction
- Make SMART financial goals
- Create a budget
- Income
- Expenses
- Needs and wants
- Debts
- Difference between good and bad debt
- Pay off debt
- Use the credit to your advantage
- Give to charity
I’m living so far beyond my income that we may almost be said to be living apart ―E. E. Cummings
You must gain control over your money or the lack of it will forever control you ―Dave Ramsey
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery ― Charles Dickens
I have spent more than two decades working in the wealth management business. Before that, I used to lend money. As a result of this experience, I volunteered to counsel people on their debt. In conclusion what I learned was that people are drowning in credit cards, personal, consolidation, payday, and mortgage debt.
The whole goal of my blog is to empower you. The reason for this series is how to use the money to make you happier.
What is debt? Is it a monster? Or is it something that if used wisely can help you achieve some goals.
In financial terms, when a bank, credit card company or an enterprise lends money to another person is the creditor. The person who receives the credit or the funds is the debtor. Debt means you owe someone money and credit is when something is given to you in the form of money. A loan is a contract between a debtor and creditor which defines the terms by which the debt will be repaid.
The amount borrowed is called the principal. The amount of time the debtor has to repay the principal is the term. The creditor makes money by charging a fee which is called interest.
Difference Between Good and Bad Debt
The most common personal loans are student loans, car loans, home equity, credit card, mortgage, and payday loans.
These loans are either secured or unsecured. A secured debt is when the creditor asks for collateral in the form of a house. A mortgage is an example of secured debt.
Credit cards and lines of credit where there is no collateral are examples of unsecured debt. The creditor is giving you money based on your income, job history, and credit history. These kinds of loans require minimum payments, carry high interest, and are dangerous.
Unless you inherit money, you have to get into debt either to buy a home, go to school, or to start a business. It is very important to look at what is good and what is bad debt.
If debt increases your net worth and continues to grow in the long run then it is considered good debt. I personally took out a line of credit to do an MBA. That investment has resulted in my income, knowledge, and contacts increasing my net worth. It increased my value as an employee.
I bought a home in 2004 which has tripled in value in 15 years. The mortgage payment was equal to me renting a two-bedroom condominium.
Another good example is when you borrow to buy a good stable business or a well-known franchise.
I personally recommend that you lease a car rather than buying a brand new car. Here is my issue with buying a new car. The depreciation of the car. The decrease in the value of an asset is called depreciation. If you pay $20,000 for a brand new car. As soon as you drive it off the lot, it loses 10% of its value. In a year, it loses 25% of its value. In three years, it is worth less than 46%. Good debt is one that increases your net worth. In buying a new car, you are paying for an asset whose value keeps on going down. If you are self-employed, lease a car.
Bad debt does not increase your net worth or generate income. Bad debts have high-interest rates. Credit card, borrowing to invest in the stock market also called leveraging, payday and cash advances are examples of bad debt.
Pay Off Debt
The best way to pay off your debts is by having a budget. I have already written about keeping track of your expenses and save any surplus. Keep a track of all your monthly debt payments. You also need to be aware of the interest rates on each. The debt with the highest interest rate needs to be paid first.
If you have countless credit card debts, personal loans, and other debt, I strongly recommend getting a consolidation loan. This loan will have a lower interest rate and will be one payment a month. If you have equity in your home, get a home equity loan or add it on to your mortgage.
Use Credit to Your Advantage
Credit can be used to your advantage. I have given examples of how you can use credit to buy a home, get a college education, or start a business.
How about using a credit card which has points or different advantages. If you have the funds in your account, make a major purchase or your groceries on the credit card. Get the points. Invest the funds in a high-interest account for a month. Get the interest on that money. When the time comes to pay the bill, withdraw the funds from the account, and pay the bill. This is a win-win situation. You have got your points, you got interest on the money you deposited and you also paid your entire bill on time.
Conclusion
I taught a course on financial planning for five years. I also volunteered for two non-profit organizations in the area of credit counseling. I noticed that the same people were taking the same course every year because it was free.
There are times when you just have to see a credit counselor. Make sure they are looking out what is best for you and give you a plan.
I also recommend that in some cases you might need professional counseling or to see a life coach. My goal is to empower you to lead a balanced life. You have to have the physical, emotional, spiritual, mental, and psychological areas of your life in balance. There are times you might be compensating by overspending or shopping too much to make up a deficit in other areas of your life.
Here is my call of action. Make sure you have your debts under control. Write to me about how you are faring in this area.
Photo Credits: Alice Pasqual Ian Espinosa
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