In today's economy, people tend to think that any debt is bad. While the ideal is to live debt free, that is not possible for many people. It is true that many types of debt will only hurt you in the long run, but there are some types that can be good for you. Learning to differentiate bad debt vs. good debt is an important aspect of wise money management.
What Is Good Debt?
In a nutshell, good debt is any type of debt that will benefit you in the long run. In other words, any debt that provides you a net gain can be considered good. This means financing a purchase which will appreciate in value, or paying for educational opportunities that will enable you to get a job with higher pay. Although you have to take out debt to begin with, in the long run you will be better off for having done so.
A classic example of good debt is the student loan. Taking out a student loans enables you to go to college or to pursue career training, which will pay off by helping you find a better career with higher pay. At least it should, its not advisable to borrow solely to get a degree in basket weaving as the saying goes. Student loans become bad debt if you choose a major that will not get you a good job. However, simply possessing a degree may open more doors to you, so it may still be good debt if you use it to further your goals.
Mortgages are another example of a situation where the distinction between bad debt vs. good debt is not so clear. If your house appreciates in value, then it is good debt. However, with the collapse of the housing market many people are finding themselves upside down on their mortgages, which means you may owe more than your home is worth. That can quickly turn it into a poor investment.
As you can see, it is important to carefully choose what good debt you take on to make sure it actually will pay off in the end.
However, if you plan carefully you will likely benefit and you can work to invest only in good debt and work to move bad debts into the good category.
What Is Bad Debt?
Bad debts are any balances owed on an item that depreciates, or decreases in value. For example, using a store credit card to buy clothing is bad, because the first time you wear that clothing it will be worth much less than what you paid for it. Sometimes this kind of debt is almost impossible to avoid, such as if you lose your job suddenly and need to put some expenses on credit cards to get through.
However, that should be paid off as quickly as possible and efforts made to avoid this type of borrowing.
Car loans are another classic example of bad debt. They may be necessary if you need transportation and cannot afford a car on your own, but you should strive to minimize the amount you owe and pay it off quickly. Cars depreciate very quickly, particularly luxury cars or other more expensive vehicles.
If you are having trouble determining whether something is bad debt vs good debt, just ask yourself whether it will be worth more in five years than it is now, or whether you will make more money off of it.
For example, a student loan could be good debt, but a personal loan taken to finance a vacation would be bad debt. One will pay off in the future, while the other will just leave you paying a lot of interest.
Bad debt is easily avoided by living within your means and saving up for large purchases rather than giving in to the temptation of putting them on a credit card. Even borrowing from friends or family in a pinch is better than paying on a high-interest credit card.
Getting Out Of Debt
If your ultimate goal is to become debt free, the best way to do that is to focus on getting rid of your bad debt first. Pay the minimums on any good balances you have, but pay substantially more than the minimum on bad debts. If you are just paying your minimum credit card payments every month, you will be paying them off for a long time and paying much more in interest than you need to. Credit cards generally have higher interest rates than mortgages or student loans as well, so it makes sense to pay the cards down first. Once that is done, you can begin focusing on paying off your other bad credit lines and avoiding any additional borrowing.
Figuring out which is bad debt vs. good debt can be tricky at times, but is fairly straightforward if you keep in mind the 5 year benefits test. The most difficult part about it is being totally honest with yourself. Think carefully before you take on any new debt in order to make sure you are making choices that will benefit you in the long run. With a little careful planning and practice it will be easy to make good financial choices.
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Showing posts with label Money. Show all posts
Showing posts with label Money. Show all posts
Friday, November 23, 2012
Thursday, June 7, 2012
How To Get Money Back At Closing When Choosing A Loan
I'm pretty sure you don't know what Yield Spread Premium (YSP) is. It is hidden in most mortgage transactions until the closing statement is presented and home buyers are ready to close escrow and complete the home buying process. I didn't know what is was either. Even with "truth in lending" and good faith estimates, you're probably going to miss the YSP. THe problem is, when you pay YSP, you pay it over the life of the loan... more on that later.
I'm a computer programmer and I was brought onto a project to create a transparent mortgage tool to help consumers get a fair, honest loan. The really cool thing about the project was the main goal was to take the hidden YSP, that normally goes into the pocket of the mortgage broker, into a rebate back to the consumer. The consumer can then use that rebate towards closing costs.
I look at some old records and found a closing statement that had YSP at over ,800. I didn't even realize that I paid it. Probably because I didn't write a check for it. It was wrapped up in the loan, so for the next 30 years I will be paying interest on that ,800... which will double or triple the amount owed. That is when it hit me that giving that money back to the consumer is a really good idea. Image what you will do, if on your next home loan you can get ,800 or more back that you can use.
Our nations current economic conditions has made the consumer demand transparency in mortgage services,. So next time you get a mortgage, simply ask that mortgage broker if they are a member of the Transparent Mortgage network, and even if they are not ask if you can get the YSP as a rebate that you can use towards closing costs to help you secure your house.
I'm a computer programmer and I was brought onto a project to create a transparent mortgage tool to help consumers get a fair, honest loan. The really cool thing about the project was the main goal was to take the hidden YSP, that normally goes into the pocket of the mortgage broker, into a rebate back to the consumer. The consumer can then use that rebate towards closing costs.
I look at some old records and found a closing statement that had YSP at over ,800. I didn't even realize that I paid it. Probably because I didn't write a check for it. It was wrapped up in the loan, so for the next 30 years I will be paying interest on that ,800... which will double or triple the amount owed. That is when it hit me that giving that money back to the consumer is a really good idea. Image what you will do, if on your next home loan you can get ,800 or more back that you can use.
Our nations current economic conditions has made the consumer demand transparency in mortgage services,. So next time you get a mortgage, simply ask that mortgage broker if they are a member of the Transparent Mortgage network, and even if they are not ask if you can get the YSP as a rebate that you can use towards closing costs to help you secure your house.
Monday, May 21, 2012
Help Your Children Understand The Importance Of Money
Today's schools have many things to teach students on various subjects like History, Geography, English, Science, Mathematics and the list goes on. But there is no such school that teaches students on money management concepts like how to save money, how to spend money, how to manage money, etc. So, it is the responsibility of the parents to teach their children on how to manage their money properly.
Children are generally unaware of the importance of money and take things for granted. As a parent, you should teach your children the basic concepts or principles of personal finance. Talk to them about your childhood days and tell them how you used to save money and how difficult it would be to control expenses.
Help your children open their savings account in their name and teach them how to create a budget and how to follow it. Take your children's help in tracking your expenses related to utility bills, grocery bills and miscellaneous expenses and ask them to fill up the budgeting sheet. If your child starts doing this, then he will be able to understand the importance of money and financial situation of your household. Perhaps, your child will help you in cutting unnecessary expenses.
Functionality over fancy lifestyle
Children, especially teens, purchase expensive things to impress their friends and others. They don't want to buy things at a low price; they are not bothered about the functionality of the products that are available at affordable prices. They just want to make a purchase to get into fancy lifestyle and show-off their material possessions.
If your child is making such expensive purchases with his monthly allowance (pocket money), you need to carefully handle this situation and talk to your child in such a way that he does not get rebellious. Never give your debit/credit cards to your children, they are still not ready to take the responsibility of making transactions/payments and at times they may spend on unnecessary things, without your consent. Children should have a debit/credit card only after they start earning.
Teach financial responsibility
Ask children to do some household chores like washing their own clothes, getting groceries or vegetables to home, paying some small utility bills, etc. Give allowance as a payment for a task. Children often like to take challenges and tasks for rewards.
Allowance is a good tool for teaching children about money management. It helps your child to learn how to manage money effectively. Remember, your child's allowance should be of small amount, so that he buys something small that is needed or save the amount for something big later on. It should not be a big amount to make expensive purchases. Further, ask your child to get into part-time jobs during vacations as it helps him understand the value of hard earned money.
Manage their expectations
Don't spend money carelessly in front of your children. Also, while shopping with your children don't make it a habit of buying things for them frequently. It shows your reckless spending. Your child may easily get carried away by your shopping attitude. You need to teach your children about the importance of personal finance and tell them to live frugal and make sacrifices.
Therefore, as a parent you may have understood the importance of money management and now you need to inculcate the same in your children and give them tips to save money. See to it that your tips are helping your child save money for a period of time.
Children are generally unaware of the importance of money and take things for granted. As a parent, you should teach your children the basic concepts or principles of personal finance. Talk to them about your childhood days and tell them how you used to save money and how difficult it would be to control expenses.
Help your children open their savings account in their name and teach them how to create a budget and how to follow it. Take your children's help in tracking your expenses related to utility bills, grocery bills and miscellaneous expenses and ask them to fill up the budgeting sheet. If your child starts doing this, then he will be able to understand the importance of money and financial situation of your household. Perhaps, your child will help you in cutting unnecessary expenses.
Functionality over fancy lifestyle
Children, especially teens, purchase expensive things to impress their friends and others. They don't want to buy things at a low price; they are not bothered about the functionality of the products that are available at affordable prices. They just want to make a purchase to get into fancy lifestyle and show-off their material possessions.
If your child is making such expensive purchases with his monthly allowance (pocket money), you need to carefully handle this situation and talk to your child in such a way that he does not get rebellious. Never give your debit/credit cards to your children, they are still not ready to take the responsibility of making transactions/payments and at times they may spend on unnecessary things, without your consent. Children should have a debit/credit card only after they start earning.
Teach financial responsibility
Ask children to do some household chores like washing their own clothes, getting groceries or vegetables to home, paying some small utility bills, etc. Give allowance as a payment for a task. Children often like to take challenges and tasks for rewards.
Allowance is a good tool for teaching children about money management. It helps your child to learn how to manage money effectively. Remember, your child's allowance should be of small amount, so that he buys something small that is needed or save the amount for something big later on. It should not be a big amount to make expensive purchases. Further, ask your child to get into part-time jobs during vacations as it helps him understand the value of hard earned money.
Manage their expectations
Don't spend money carelessly in front of your children. Also, while shopping with your children don't make it a habit of buying things for them frequently. It shows your reckless spending. Your child may easily get carried away by your shopping attitude. You need to teach your children about the importance of personal finance and tell them to live frugal and make sacrifices.
Therefore, as a parent you may have understood the importance of money management and now you need to inculcate the same in your children and give them tips to save money. See to it that your tips are helping your child save money for a period of time.
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