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By John Cook
Many people have been taught that you cannot get ahead without debt. We are
also inundated with advertising telling us we can have anything we want. All
we need to do is put it on our credit card.
We have become an impatient society, we want it right now. We have lost the
ethic of working for what we want.
It is not how much money you make; it is what you do with it. By living
without debt you can actually have a higher income since you are not paying
out interest, you are actually getting paid interest on invested money.
All debt is not created equal. We will classify them as good debt and bad debt.
To simplify the classification we will say that good debt is a loan for
something that you could sell at any time and repay the debt. This narrows
down good debt to a home loan and possibly a home equity loan.
A bad debt, of course, is a loan on anything that will lose value.
Let`s take a look at some debts that we would consider bad debt.
Home equity loans are in the gray area. They could be considered good debt if
they are used to repair or improve your home, but you would be a lot better
off to just save up the money for the project. Home equity loans become bad
debt when used for purposes other than home improvement or maintenance. In
other words a bad home equity loan is for anything that does not add to the
value of your house. Do not jeopardize your home by taking out a home equity
loan on unnecessary items.
One possible good use for a home equity loan is when the interest rates are
low. You can use a home equity loan to refinance your mortgage. Home equity
loans generally have lower costs than conventional home loans.
We consider school loans bad debt. If you finish school, get a good high
paying job and then attack the loan like mad, a school loan may work out. The
problem is that there are too many things that can go wrong. At best, even if
you do graduate and get a good job there are always a lot of other expenses
at this time in ones life. You are really behind financially when you start
your working life in debt.
Auto loans are bad loans that have become common practice to us. We pay
interest on a vehicle that will only be worth one half of its original
purchase price in five years. Lately it has also been common for us to borrow
more than a vehicle is worth. We can trade a car in that we still owe on, and
roll that owed amount over into another vehicle. This gives us a loan amount
that is higher than the value of the car that we drive away. We have lost our
capacity to say NO.
Co-signing is a bad debt that usually and unfortunately involves family. If
someone cannot qualify for a loan at a regular lending institution, they
should not get a loan. The fact that they can’t qualify for a loan elsewhere
should tell you that they are a huge risk. Use this opportunity to teach them
how they can get what they want by working harder for it and delaying the
purchase.
If you want to get off of the debt treadmill, you must run as far away from
debt as you can. You cannot use debt to get out of debt. Even if you do, you
have not changed your habits; you must change your lifestyle.
John Cook is a family guy who likes to help people get off and stay off the
debt treadmill and secure the financial future of their family. You can read
more about securing your families finances at his website www.
financeforfamilies.com (http://www.financeforfamilies.com).
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