What is so Bad About Debt?

Debt is one of the most loathed 4-letter words in the world.

It is the one word that has real bite to it, unlike others which can be brushed off without too much concern.

When dealing with debt, and learning to avoid debt in the future, it’s important to follow sage advice.

First of all, what are the main causes of debt? Believe it or not, the number #1 cause of debt is not increased expenditure but decreased income. There is a lag time between decreasing income and a concomitant decrease in lifestyle.

In other words, we don’t necessarily change our lifestyles when our incomes decrease – we run up debts until we have to readjust and find equilibrium at a lower level. The top 3 causes of debt are divorce, a reduction in income (with the same expenses), and poor money management. There are several remedies to the debt dilemma, one of them being debt consolidation.

Debt consolidation loans effectively turn multiple debts into a single loan that can be used to pay off all the other loans. Instead of paying multiple payments per month, there is only one payment per month and it’s all done at a lower interest rate.

Cheaper to Keep Her? Should You Stay Married to Stay Out of Debt

Divorce is something that happens to 50% of Americans who marry. That is a startling statistic, but one that has dire financial implications. Consider, any assets accumulated during the course of the marriage will be split down the middle, or worse. Divorce is the quickest way to financial ruin for many people, and it is a leading cause of increasing debt. Close in tow is ineffective money management. Without a budget – a monthly spending plan – it’s virtually impossible to stay on top of your incomes and expenses. A budget allocates a fixed amount of money to specific components of your spending every month. These include education, housing, food, entertainment, car maintenance etc. Each of these components makes up the whole, so it makes sense to allocate funds accordingly.

Keep debt in check by avoiding the following expense items

Many people inadvertently waste money on inane expenses such as paying $5 – $7 for a cup of coffee per day. Another leading cause of debt is underemployment. This is not the same as unemployment where a person is not working, it’s a person who is not working to their full potential. For example, working part-time when you’re capable of working full-time, or working in a job that pays far less than you are actually worth. It’s never a good time to stop working when your expenses are piling up.

The priority is debt management, not debt addition. Rather than procrastinating, or waiting for the ideal job to come up, it’s always a good idea to stay as busy as possible because at the end of the day the money is all the same color. For people who have a penchant for volatility, there is no faster way to debt than gambling. There is a reason the casinos in Las Vegas have stood the test of time – the house always wins. Long-term, the player is disadvantaged with casino games, so it’s better not to test that theory.

What’s the Difference between Good Debt and Bad Debt?

Well, it’s pretty simple: good debt increases your net worth and helps you generate added value in your life. When you take out a mortgage for a property, that’s considered good debt. Or, when you take out student loans to finance your education that’s considered good debt. Another example of good debt is when you weatherize your home so that you can save on energy bills and utility bills. This will invariably save you money down the line.

Bad debt by contrast is when you spend unnecessarily on high-interest credit cards. When those accounts are not paid off every month, they grow at a rate of knots. The late fees, interest repayments, and penalties you may incur overwhelmingly exceed the value of the product or service that you have purchased. That’s bad debt. When debt repayments exceed 36% of gross monthly income, that’s a problem, and this metric should always be borne in mind when evaluating good versus bad debt.