PIC Current

by Mike Lazear, PIC Current Assistant Producer

This is the second of our three-part series on mapping your financial future.  Check out yesterday’s edition to learn effective saving strategies.  Today’s we talk debt, and what you can do to get out of it!

You probably don’t need to be reminded of just how big the debt issue has become in the United States. Our national debt recently hit the $10 trillion mark.  That’s trillion with a T. It’s to the point where it feels like we’re playing with Monopoly money – where debt does not matter. Well, this is not Monopoly. Debt can be a silent killer of financial dreams.

What can you do about it?

First, it’s important to recognize that personal debt is a common issue. If you take a look at you neighbors, you can be pretty sure that just about all of them have some form of personal debt, whether it is from a mortgage, a car, credit cards, or all three. Some of these debts are not as bad as others. It’s important that we distinguish the difference between “good” and bad debt. If you really think about it, there is, of course, no such thing as truly “good” debt, but some debt can lead you to a place of better financial health in the future by taking a short-term loss. Let’s take a look at both categories.

Good Debt

School Loans

Most young people cannot afford to go to school without incurring some debt. The FAFSA website was created for the purpose of giving students easier access to the management of their loans so they can go to school, focus on their work, and not have to worry about financial matters for the time being.

These loans are “good” for two reasons.

• They allow a person to increase their earning potential dramatically after graduation. What a high school student can reasonably expect to earn isn’t nearly as much as what a college grad can.
• It doesn’t have to be paid back at all until after graduation, when the student has started earning a living.

Here are some great links that will teach you about student loans or how to go about obtaining one:

Sallie Mae – Sallie Mae is a trusted loan provider. Their website will answer any questions you may have.

Chase – Here is an example of a private bank student loan. The interest rates are sometimes higher.

Official FAFSA Website – This is the official application site for federal student aid. It is a good place to start if you are interested in taking out a loan.

Financial Aid Organization – This helpful site will answer any questions you have about student loans in general.

Home Ownership

The advantages of owning a home have, historically, outweighed the disadvantages. True, we are in a time when the market is definitely not favorable for owners. It’s a “buyer’s market.” But home ownership gives several advantages:

• A lot of flexibility. If times get tough, an owner can always rent out rooms in a house and collect rent.
• The chance of making a profit when the markets in your neck of the woods improve.
• The ability to control little things about your life, like when to paint the walls and what color to paint them.

There is some risk involved in owning a home, but if you can afford the mortgage, the benefits usually make it well worth it, even today.

For more information on homeownership:

Freddie Mac – Freddie Mac site on whether homeownership is really right for you.

Financial Literacy Homeownership – This site goes through the financial literacy of homeownership, and has a lot of good pieces of advice to consider.

Countrywide – Countrywide lets you manage your mortgage or get answers to any questions online.

Mortgage 101 – This site has a nice mortgage loan calculator for you to experiment with.

Bad Debt

Credit Cards

Let’s say you purchase a nice $160 pair of shoes. They are all you have always wanted. Now let’s say that you are running a bit low on cash at the moment. You take out your trusty credit card, fully intending to pay it off later. At the end of the month, however, bills are a bit tight, and you decide to just pay the minimum balance instead. This goes on for a few months.

Congratulations! Your $160 pair of shoes actually cost more like $230, and they are already getting worn out, just like your financial situation.

It’s very important to realize that credit cards are a good thing for emergencies only. If you are running low on cash, or you have an emergency expense come up, then it’s understandable. However, because of interest rates and the danger of becoming trapped in credit card debt, it’s always better to just pay cash if you can. You’ll end up spending far more for a few purchases unless you pay the card off immediately. And if you can do that, why not just pay in cash up front? Think about it.

For more on how to get out of credit card debt:

About – This site has a lot of great credit card debt advice.

Secure Loan Consolidation – If you are looking to consolidate your debt, sites like this can help you do so. Make sure to really research some of these companies, however, as not all of them are going to be that helpful.

Fool Personal Finance – 60 second guide on how to get out of debt. Getting out of debt will take you longer than 60 seconds, but that’s how long the article runs.

Money at CNN – Some more good advice.

You Can Deal With It – And finally, 9 rules to live by when trying to get out of credit-card traps.

Vehicle Purchases

I know what you are thinking. How is this “bad” debt? Everyone needs a car, right? Well, I’ll be happy to explain.

First of all, not everyone needs a car! Gas prices are incredibly high these days. If you live close to work, or in a city with good public transportation, it will be far cheaper to bike, walk, or take the bus in the long haul.

If you really do need a car, it is still not “good” to be in debt for one. It’s always better financially to just pay for a less expensive one, or reliable used one all in cash. Most vehicle loans still require that you pay interest on your purchase, so you’re paying more for the vehicle than you need to. And with $20,000+ vehicle purchases, you will have $200-$400 minimum monthly payments to deal with. Cars depreciate in value by a significant amount the second you drive them off the lot, and continue to do so with every mile you add.

Vehicle purchases create bad debt. Necessary debt in many cases, but still bad debt.

For more on vehicle loans:

Credit Cards at Love to Know – There is a vehicle debt calculator on this site, with some additional advice included.

Center 4 Debt Management – The worst case scenario: vehicle repossession.

Debt Free Living – A great article on how to drive your vehicle debt-free.

How to get out of debt

No matter how bad your debt situation may look, there are often ways out that you have not even considered. There are ways to budget yourself so that your debt is more manageable as well. For more on debt management, check out these great links:

Smart Money – Good information on how to get out of debt.

Debt Consolidation Care – Get out of debt without hurting your credit score

Money Management – Answers to questions about credit

Dave Ramsey’s Website – Dave Ramsey’s debt snowball plan

Get Rich Slowly – Some more advice from the “Get Rich Slowly” blog

About – Talks about minimum balances and the trap of paying them if you can pay more

Tune in tomorrow for Part 3 of our series and learn how to create a budget!

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