Now that I’ve lost my ability to itemize deductions on my income tax return and therefore can’t itemize my mortgage interest, I feel like the Good Debt versus Bad Debt argument has gone out the window. However, most people don’t have the resources to go lay down cash for a home so a mortgage now feels like a necessary evil. Student loans are an entirely different beast for another blog post but they deserve a quick mention. According to the Federal Reserve the average student loan payment is $393 a month. That could be a mortgage payment! Auto loans are next on the list. In general I do not like to incur auto loan debt unless I can finance for less than 7% as I can make more of a return on my investments.
The worst debt you can have is credit card debt. According to Bankrate.com the current average credit card interest rate is 17.87%. Store specific cards tend to be even higher. If you can’t pay off the card balance every month don’t use them! Now, I love my Upromise rewards card. This card has no annual fee and earns me 1.25% cash back on every purchase. I also get an additional 15% bonus on top of my total cash back because I have linked my rewards with my 529 College Savings Plans. I run as many of our expenses as possible through my rewards card and then pay it off each month. All of my rewards are being funneled right into investments for my children’s higher education, hopefully drastically cutting down on any student loan debt they would have to take on down the road!
I also utilize introductory or special financing options all the time. I have financed everything from furniture to flooring and even a surgery this way. You also need to be disciplined to use these tactics. I take the period the offer is good for, which could be anywhere from 6 months to 3 years, subtract one month so I don’t goof and miss the payoff date, and divide the amount borrowed by the number of months to come up with my monthly payment to have that purchase paid off within the time frame. This has allowed me to make a big purchase at 0% financing without depleting my cash on hand that is earning me interest in the bank. However, if you can’t pay off these offers before the introductory time frame ends don’t use them! In the fine print of these offers it usually states that not only will they begin charging an insanely high interest rate once that period is over, they will also charge that insanely high interest rate retroactively to the beginning.
If you have made some mistakes with debt, as we humans do, I urge you to get that proverbial monkey off your back as quickly as possible. The best way to do that is the now infamous debt snowball. Basically you make a list of your debt and the minimum payments on each. You can put these in order of highest interest rate first which will save you the most interest in the long run or you can order them by smallest debt first so you see more debt being eliminated right from the beginning. Then come up with an amount you can add to the minimum payment each month and add that to the payment on the top of your list, while you continue to make minimum payments to the rest of your debts. Once debt one is paid off add that monthly payment onto the debt two’s minimum payment and so on. Hence the debt snowball, as a snowball rolls down a hill it continues to pick up additional snow and moves faster! There are many calculators that can help with this, my favorite to use is at What’s The Cost?
As you are working through your spending plan figure out how you can attack any debt you have. Remember, you may have to cut back for a while on some fun things, but it will be worth it in the long run!