14 February 2018

Crunching the Circumstances: the Perils of Bad, Unmanageable Debt

It is a simple fact of modern life that debt is something we expect to have. Figures show that the total amount owed by American consumers is over $110 billion, which is a number so large that few of us can really conceive of it.

When Debt Is Good-- 

Of course, some of that debt -- in fact, probably a large proportion of it -- could be classified as “good debt”. Good debt is a term used to describe an affordable debt, that is well managed, and has been used for a specific purpose. Examples of “good debt” include:

+ Debt sustained due to home improvement costs, which will ultimately add value to your home

+ Debt sustained due to education costs, which will ultimately allow you to get a better job and earn more money

+ Debt sustained for other productive reasons that will generate revenue or improve your living standards considerably

There is nothing wrong with “good” debt; in fact, it’s something of a necessity if you want to advance your life. There’s a big difference between someone who carefully researches their purchases, always looks for a credit card review before signing up, and never misses a monthly payment, and a person who is spending for the sake of spending. Debt doesn’t have to be a terrifying thing, providing it has a purpose and is affordable.

What Kind of Debt Do You Have?

The statistics indicate that most people reading this will have some level of debt. It’s worth thinking through whether your debt is good debt or bad debt, as this helps to analyze your spending habits, and may help you correct course for the future.

If you have bad debt, then it’s worth sitting down and thinking through how you spend money, and how you’re going to address this in the future. Bad debt in the past is acceptable -- especially if you had no other financial choice when it was sustained -- but it’s important to learn not to repeat the same habits.

If you have good debt, then you can largely trust your instincts when it comes to financial planning and debt management.

However, that’s not the end of the question. The next thing you have to ask yourself is whether your debt is manageable or not-- and this is where many people run into trouble.

What Is Manageable Debt?

Be it good or bad debt, manageable debt is best defined as:

+ Debt that you can comfortably make the repayments to-- your budget is not squeezed to make repayments, and it is an affordable monthly expense.

+ Debt that is no more than three times your annual income.

+ Debt that is consistently paid, so no late payments, ever

If your debt -- be it good or bad -- meets the above criteria, then your financials are fairly typical, and your debt is under control. You should still address it, but your debt situation is manageable.

If Your Debt Isn’t Manageable… 

… as per the above criteria, then you might want to talk to a debt adviser or assess your outgoings for potential savings. This is especially true if you find yourself with bad debt that is unmanageable. If you find yourself in this stormy situation, then taking action and examining methods of getting out of debt is an essential step towards the future you want for your family.

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