Personal Finance: Thinking about Debt

These days, lots of folks have issues related to debt. Whether it is form student loans, credit cards, mortgages, car payments, or any one of a thousand sources, debt is for a lot of folks, a fact of life.

There are two important things to keep in mind when you manage debt. The first is to think in terms of balancing debt and net income over time. $1000 in debt may be tiny or huge depending on your income profile.

So a quick point – if you are living on the edge, that is spending every last penny of your pay check to get by to the next pay check, you should not be carrying a lot of debt. If you are, you are in a high risk group. this is especially true for debt that imposes high interest rates, like credit cards or other consumer debt.

What to do if you are in that hole? The first step is to take a close look at what you are spending your money on. If you are in a high risk group. you really need to cut back on waste. Driving a fancy car? Going out a lot? If you can cut back on this stuff, do it. Do it even if it hurts a bit. The second step is to give some sober thought about your income potential. Can you reasonable expect to earn significantly more soon? If not, you may want to think strategically why not. Where you are now, you cannot afford your lifestyle.

The second debt management idea is to be aware of carrying costs. How much interest are you paying out per year? do you know? If you are putting yourself in a position to pay off debt, pay down high interest debt first. That high rate may not seem like a lot on your monthly bill, but it is a killer over time.

While you are considering this stuff, keep in mind that  your ultimate goal is to have enough money when you need it most. Over time, your needs will go up. For a while, you income potential will too. But there will come a time when it gets harder to earn more. And your needs are not going to go down. The sooner you can start building up financial resources to meet that challenge the better.

For boomers thinking of paying off their mortgages early, here is some advice.

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