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The importance of leading a debt free life

Personal finance – The importance of leading a debt free life

Debt is one of the most common financial problems in the lives of most US citizens today. It has become a literal fact of life and you need to be aware that debt is definitely harmful for your financial health. You’ve got to understand the essential fact that debt is an increasing expense and that too because of the interest involved. It’s this interest that needs to be repaid on top of the capital that you borrowed. You could at best think of the interest as the cost of borrowing money. It becomes all the more important when referring to the amounts that are owed on credit cards which haven’t been paid off on a monthly basis. However, it still remains quite important that you save and invest even while you’ve accumulated a certain amount of debt. This is why it’s considered important that you know the difference between a good debt and bad debt.

The concept of good debt

Generally even debt is broken down into 2 separate categories – good and bad. Well, good debt essentially happens to be a loan that you acquire for the purpose of paying off something that’s going to be used for years to come and will increase your worth too. These kinds of things include a home, car or even education for that matter. Each of these items actually represents a purchase that’ll help you build your future.

The concept of bad debt

When you talk of bad debt, then it essentially comprises of credit card debt. This is mostly generated from the purchase of items that you can’t actually afford and whose economic life is short. If you purchase high end consumer goods or take expensive vacations, then such activities generally lead to bad debt. This is why you should use credit cards sparingly and make sure that you pay off the balance as soon as possible. Remember, the interest rates are generally much higher in case of bad debt.

Importance of savings in personal finance

You should always have a cash reserve in place, be it in the form of savings or a money market account and it should hold at least 6 months’ worth of living expenses. If it’s more than 6 months, then it’s definitely the best situation for you. Once you’ve managed to do that, your sole concentration should be to straighten out your personal finances and that can be done by paying off any bad debt that you might have. Try not to use your credit cards during this period and restrict your spending to the minimum amount possible.

Investments are good for your personal finance

You see investments are rather good for your personal finance for they help accumulate a cash reserve. As for good debt, then they come at a low interest and are spread over a period of at least 10 to 30 years, like a mortgage. If you’re wondering whether or not you should pay off your debt in full or invest, then it’s always a good idea to go for an employer sponsored investment plan at the least. Leading a debt free life is definitely important, but so are investments. If you’ve got good debt and the interest rates happen to be low on the loans now, then you might as well invest a small amount per paycheck before the taxes have been taken out for your own benefit.

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Debt free life is one dream of all and for majority that remains as a dream. There has to be some stage you have to depend upon loan from a finance company and it takes some time to repay it. Thanks for a relevant topic to discuss and the comparison of good debt and bad debt was very helpful.

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