Even if you’re financially responsible, life’s unpredictable nature can sometimes catch you off guard, at times making it dangerously easy to fall into debt. Discover how to start managing your debt with these tips and tools.
While being in debt is never ideal, some types of debt are better than others because of the effect the debt can have on you or your net worth. To reflect this, debt is sometimes broken up into “good debt” and “bad debt.”
“Good Debt” is debt that is an investment back into yourself or that increases the value of what you own. That could include things like student debt or things that can grow in value over time such as a mortgage or investments.
“Bad Debt” is when you borrow for something that you are losing money on. This could include things like credit card purchases for clothes or food and payday loans. Because of how quick cars lose value, auto loans often walk the line between “good” and “bad” debt.
THE MAIN DIFFERENCE BETWEEN GOOD AND BAD DEBT IS WHETHER THE INVESTMENT WILL APPRECIATE AND GROW IN VALUE OR DEPRECIATE AND LOSE VALUE.
That being said, even if your debt is technically “good,” that doesn’t mean it won’t still end up hurting you if you become unable to make your payments.
There are strategies to help you get back in control if you’ve found yourself falling behind or growing impatient with your debt payments.
Our online Financial Coach can help you make a customized plan to pay off your debt and learn more about what some of these strategies could look like for you.
Beyond the major strategies, there are other adjustments that you can make to your approach to debt and daily spending habits that can make a large impact.
Be wary, though, of any debt counseling service that requires an upfront fee for a solution that doesn’t involve changes to your spending habits. Unscrupulous organizations prey on people at their most vulnerable, often by suggesting there is an easy, quick way to get out of debt.
If you’ve been contributing to a retirement savings plan at work, you may decide it’s better to tap this resource in a financial emergency rather than paying only the minimum due on your credit cards or skipping some payments altogether.
Borrowing from your retirement funds to solve debt problems is not an ideal solution and should only be done after careful consideration. After all, you’ll still need income from your savings down the road. But if borrowing from your 401(k) or similar plan helps you put a halt to accumulating debt, that may help you get back on your feet faster. And, typically, you can repay the amount you’ve borrowed on a gradual basis through payroll deductions. The interest you pay goes into your account as well, rather than to a commercial lender. Withdrawing from your retirement funds, rather than borrowing from them, will incur penalties, so be wary.
In some cases, people have used home equity loans to pay off debt. But that type of borrowing puts your home at risk if you default, so be careful. In addition, it’s much harder to find such loans today since this type of cash-out borrowing contributed in part to the housing crisis.
One of the smartest things you can do when things are going well is to establish an emergency fund as part of your savings plan. You should aim to set aside enough money to cover at least three to six months of living expenses. That way, if an unforeseen event puts a drain on your finances, you’ll have some back-up funds to help see you through.
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