Debt 101: Good Debt vs. Bad Debt

Is the bulk of your debt “good” debt or “bad” debt? Find out here.

Do you have student loans looming over your head? Or perhaps a car loan that really pains you to pay on every month? You’re definitely not alone. Most Americans have debt, and it has just become a part of our lives. Most of us are also searching for ways to pay off those debts as quickly and as smartly as possible.

The first step to paying off your debts and keeping yourself from getting further into debt in the future is understanding that there are different types of debt. “Good” debts are debts that positively impact your financial future, and “bad” debts do just the opposite.

Below we will take a look at four of the most popular types of debt and determine which are good debts and which are bad debts.

By Grant Sabatier

Mortgage Debt

Mortgage loans are an excellent example of good debt if you use them responsibly. When you take out a mortgage loan, you’re not only putting a roof over your head, but you’re getting tax deductions and a financial asset that is likely to appreciate over time. Also, with mortgage programs offering down payments as low as 3%, funding a mortgage is more accessible than ever. While mortgages are long-term loans, by the time you pay off the mortgage, your home could be worth more than what you initially paid for it. Also, making consistent, on-time payments can help improve your credit score.

But mortgages can also become bad debt if you buy a home that is more expensive than you can afford and ultimately have to default on your mortgage payments. A good rule of thumb is to take out a mortgage that you can pay with 25% – 35% or less of your after-tax take home pay. This will give you some flexibility and ensure that you’re not “house poor” because you are spending too much money on your monthly mortgage.

Also, when buying any home there are additional costs above your mortgage payment that should be factored into your calculation, like taxes, repairs, and any assessments. The best way to ensure that mortgage debt is good debt is by making sure you can afford your monthly mortgage payments.

Student Debt

Student loans can be another example of good debt – with some caveats. As scary as student loan payments may seem, there is still a positive correlation between a college degree and future earnings. Having a degree immediately increases your value in the work field and presents opportunities that would otherwise be unavailable. Student loans also offer low-interest rates, while other types of debt are notorious for having crippling interest rates. This is the type of good debt that acts as an investment in your future.

But that also doesn’t mean that all student loans are worth it. The value of your student loans can be determined by other factors, like where you go to school, what type of degree you get, and what you do with your degree when you graduate.

Car Loan Debt

On the other hand, bad debt is something to be avoided. If you’re borrowing money for something that is a depreciating asset, then this debt could be a bad decision. The average American pays around $500 a month on a car payment, which in most cases is bad debt because a car is a depreciating asset (meaning it goes down in value over time). While it might be nice to be driving a nice new car, it’s a much better financial decision to buy a used car with cash if you can.

Or think about if you really even need a car – it’s never been easier to get around using public transportation and ridesharing, which might end up being a lot cheaper than owning a car in the first place. Why saddle yourself with $500 a month to pay for the next 6-7 years, when you could buy a less expensive car and use that money to invest in stocks or real estate that can go up in value? In almost all cases car loan debt is bad debt.

Credit Card Debt

Credit card debt is arguably the worst form of debt because the interest percentage is so high. The average credit card interest rate is over 15%, meaning you pay the bank 15% every month you don’t pay your credit card balance in full. It’s easy to swipe your card for every single purchase, but credit cards are rarely used to pay for something that will have future financial returns. Even a small balance on your credit card can accumulate into a massive outstanding debt due to high-interest rates and late fees for missed payments. If you don’t pay your monthly bill in full, these interest payments can quickly drag you into debt and end up taking years to pay off.

Bad debt is avoidable by asking yourself if the purchase is a good investment. If the answer is no, then going into debt for this purchase is a bad decision. Consider if the debt can set you up for long-term financial security and help you build an asset. Now this doesn’t mean that credit cards are bad, you just need to use the debt responsibly by paying off your full credit card balance each month.

Final thoughts

Often whether or not debt is good debt or bad debt depends on how you use it. If you are smart with it, like getting a mortgage to purchase a home, you can buy an asset that could go up in value. On the other hand, if you take out a bunch of debt for something that goes down in value you could find yourself in a big hole. Always be very careful about borrowing money and using credit.

Read the full article here.

The Millennial’s Guide to Important Financial Documents

It’s time to get your important papers organized once and for all!

If you haven’t yet figured out a system for organizing and filing all of your important documents, such as tax information, bank account paperwork, birth certificates, etc., now is the time! You just never know when disaster will strike and, when and if it does, you’ll want to know that your important papers are in a safe place.

It’s a great idea to use a waterproof, fireproof, locked box or safe to file your important documents. You should also have digital copies saved somewhere secure, if possible. But which papers are the most important ones to keep safe and secure? Check out the list below.

By Frozen Pennies

Tax Information
Tax return information from the last seven years. If you do your own with any electronic software like TurboTax, they will store your tax forms for you, but any W-2’s or 1099 forms need to be saved as well.

Also, any type of correspondence from the IRS should be kept in a file. If you owed the IRS money and had paid them, make sure you keep all receipts

Receipts
If you have anything that is a deductible from work expenses or charitable donations, make sure you keep those in a safe place for seven years as well. If you are trying to go paperless, scan those receipts and keep them on the cloud or a hard drive.

Healthcare receipts are other important financial documents that must also be kept and safe.

Investments
If you have purchased stocks, you need to have a record of how much you bought them for so losses and gains can be calculated. However, the person you are paying to manage your investments will generally keep track of this for you. If you are designing your portfolio, this is something that you need to take responsibility.

Retirement accounts and 401K documents are important financial documents that should have a place in your system.

Insurance Policies
Copies of your homeowner’s policy or renter’s policy are nice to have on hand and easily accessed. Please also consider taking photos of your home and belongings to keep with that policy.

Life Insurance policies should also be kept safe.

Financial Accounts
Bank accounts, passwords, mortgage account information and any other loan documentation that you might have.

Other Documents
Birth Certificates, marriage, divorce papers, and social security cards are essential to keep safe.

Having auto registrations, titles, and insurance policies organized and on hand make to so much less stressful if you need them in a hurry.

Legal documents like health care proxy, power of attorney, legal will as well as copies of any that may pertain to you from family members. A letter of instruction for the family might be a nice addition to this file.

Read the full article here.