When it comes to debt, everyone should pay attention; otherwise, you will be paying your money to others for the rest of your life.  Debt is a tool, not a convenience.  It should be taken seriously.  Your credit has been made convenient for you to use on a daily basis.  Your credit availability has been established from the amount of your income, your ability to pay, and your credit and debt history.  While examining your credit worthiness, banks and lending institutions will classify you in one of two categories.  You will be viewed as a creditor or a debtor.  A creditor is someone that when given a loan has the financial ability to pay off the loan whenever he wants.  A debtor is a person that when given a loan has every intention to pay that loan off but not necessarily right away.  If you are a creditor, you may receive favorable interest rates from lending institutions.  If you are a debtor, your opportunities may be limited.  You may have to pay more for the use of “someone else’s money” (SEM).  Excessive debt will impact your ability to receive any additional credit, and in a credit-frenzy society, this could make life difficult.  Don’t ever feel a bank of lending institution has done you a favor in lending you money.  They will profit from you…every opportunity they can, without shame.  Heaven help you if you are ever late with a payment, even just once.  In the fine print, your tardiness allows them to stain your credit history, raise your interest rate, charge you additional outrageous fees and jeopardize the interest rates you have with other lenders.  The fine print was designed by a large team of high-priced lawyers to defend the bank from you and then punish you as severely as the law will allow them.  The scariest words from a lending institution are “don’t worry, signing these forms will just take a minute and you’ll be on your way.”  In addition to purchasing the goods you wanted when you signed these papers, you unknowingly started a series of events that could change your financial life.

It is unfortunate that our politicians and representatives, who have been elected to help defend us against harm, allow financial companies to charge interest rates to the public that are 20%, 30% and 40% higher than the prime interest rates.  Millions of Americans have pledged their future incomes not just to purchase everyday goods but also homes, cars, and their kids’ education.  In today’s world, credit is not an option: it is almost a must.

When debt is created, it is everyone’s intention to pay it off.  Unfortunately, there are events in life that we don’t control.  Almost half of all foreclosures of houses today are caused when there is a disability and a loss of income in a household.  It is becoming more common that the loss of a job, an illness, a divorce or a death leads to a path of financial disaster because of debt.  No matter what happens, the debt payment is due.  When it comes to your credit and debt, be proactive, not reactive.

THE “DUES” AND DON’TS OF DEBT

• Don’t just pay debt; manage it.
• Don’t be late when paying.
• Don’t sign up for credit cards at a store register.
• A purchase becomes part of your real debt if you don’t pay it off in 30 days.
• Don’t continuously “flip” credit cards.
• Don’t finance your home to the max.
• In some cases, paying cash is not always the best option.
• Learn to save.
• Become a creditor, not a debtor.

THERE IS GOOD DEBT……

Unlike our grandparents would have us believe, not all debt is bad debt.  Using someone else’s money (SEM) is not a bad thing for purchasing a house or a car.  Using debt could allow some families to maintain their lifestyle even while sending Junior to college.  Unfortunately, except for mortgage interest, interest that is paid on most other loans is not deductible from your federal taxes.  Some borrowers may elect to take a loan for a purchase, even though they have enough money and savings to pay cash for the goods.  They may feel that the rate of return they are receiving on their savings is greater than the interest rate they will pay for the loan.  If debt can create real value in your life, and you can financially control it and not have it control you, then use it.  Remember though, the interest you pay is a transfer of your wealth.

You may have a financial tool available to you that you haven’t considered.  If you own a home, it is possible that you have accumulated a lot of equity.  When borrowed, the equity interest you pay will most likely be tax-deductible.  The IRS has some limitations, but your equity can be a powerful borrowing tool.  Imagine borrowing money for your child’s education and having the interest you paid become tax-deductible.  Imagine borrowing money for a new car and being able to deduct the interest paid.  Depending on the interest rate, this would be far better than not deducting the interest payment.  Imagine receiving a tax refund on the interest you have paid.  Receiving the deduction is recapturing a wealth transfer that you were otherwise simply giving away.

WELL, WHAT ABOUT……

Someone is going to ask, what about investing money in the markets?  Just about everyone, including me, invests money into stocks and mutual funds.  When you invest one dollar, it is in the hope that it will go up in value and continue to grow.  The problem is, there is nothing you can do, no control, to make that fund or stock grow.  There is no way to drive the value of the stock or mutual funds forward to make more money.  There is also no hard assets, like a house or a business, when it comes to mutual funds or stocks.  You can improve your home and business and make the value increase while you are using them for shelter and income.  You can also buy more insurance for pennies on the dollar, thus increasing the legacy for your family.  Don’t get me wrong, I think investing in solid stocks or funds is good but is typically not purchases with outcomes that you have some ability to control.

The reason I’m bringing this up is that I would not have a problem borrowing money to improve my house or business, but I would have problem borrowing money to invest in stocks or mutual funds.  If someone did borrow money to invest in the market, he would face the interest he must pay for borrowing the money, the risk of down markets, fees, and taxation on any growth in value.  To me, that is too many negatives to face in an attempt to increase value.  Remember, LEVERAGE is the attempt to use the LEAST amount of money to gain the most value, control, and security in your life.  I would rather learn to make one dollar do the work of 10 instead of trying to make 10 dollars earn the value of one…that is LEVERAGE.

THEN THERE IS BAD DEBT

The “I’ll figure it out tomorrow” crowd is in serious trouble when it comes to personal and family finance.  Our society is filled with a whole generation of “I want it now” thinkers who live on the very edge of financial collapse.  Financial debt causes more depression, desperation, and divorce in our country than anything does. 

Debt ratios are tearing the very social fabric of our society.  Bad debt can be caused by a lack of will, knowledge or just simply bad luck.  No matter what the excuse is, the result is the same: the debt must be paid.  Americans buy things on credit that go out of style, break and don’t work, or end up in a garage sale before it is paid off.  Personal debt ratios have increased much faster than personal incomes and savings.  A large dose of reality will impact our entire country if changes about personal and government debt don’t occur soon.  The next generation of Americans faces the possibility of becoming the first generation of Americans to have a declining standard of living.  Many Americans are in the mode of controlled failure.

In many cases, bad debt can be overcome with the use of knowledge and common sense.  No one is holding a gun to your head and saying buy, buy, buy.  Yes, it is getting more difficult to save, invest and maintain your lifestyle because the forces around you have changed and you haven’t.  These Essential Lessons will give you a base for your everyday financial lives. Along with outspending incomes, the focus should be on other transfers that cause financial uncertainty in your life.  These are situations that you can learn to control.