Debt

Taking on some debt may or may not be a good thing.   First the potentially good use of debt may be a fixed-rate home mortgage or auto loan with payment amounts that you can afford.  Taking out a variable rate home mortgage could be a horrible mistake if interest rates rise so much so your payment becomes unaffordable.  Try to avoid variable rate loans for home mortgages  because the balance you are going to carry is probably large and will be carried for a long period; you might want to use them only in the form of a line of credit and only for smaller temporary balances.  A home equity line of credit could come in handy in the event you experience an unexpected need for access to funds that you do not have in a bank savings account or choose not to liquidate an investment at that time.  Taking out a student loan or loans to get through college is probably one of the best things you can do for yourself if it means you get a college education.  Statistically you are likely to make far more income in your lifetime as a college graduate than if you only have a high school diploma.  Federal aid is probably going to be cheaper and have more flexible repayment terms than using a private lender, so take a look at Federal programs first.  How much you can borrow, when interest starts to accrue on your loan, when and how re-payment is due and how much interest is charged depends on a variety of factors.    To get your debt paid off consider making more than the minimum payment, increase your payment as you get raises, and consolidate loans by refinancing if you can get a lower rate.  Some public service jobs are also available that provide loan forgiveness.  Credit cards that offer rewards programs tied to paying off your loans are another interesting way to get that debt paid off as soon as possible.   Subject to certain limitations, home mortgage, home equity lines of credit and student loans could be tax deductible depending on each individual’s circumstances. 

Now the bad:  too much consumer debt can be a bad thing because it may hinder you while you pursue your financal goals. While it is tempting to buy the latest and greatest gadgets that you can't afford to buy with your income or savings, it is important to put into perspective how long it will take you to pay for items you charge on a credit card and how much you will end up paying in interest.  Here is an example of how painful it can be to carry a large credit card balance: if you go to your local electronics store to pick out a big screen TV and charge up a balance of $2,500 on your credit card, your interest rate on that card is 15.30%, and you pay $50 per month, it will take you 79 months to pay off your card. That's over six and a half years! What is more painful is that you would have paid the bank over $1,500 in interest on top of the $2,500 you charged, making your total debt $4,000. Imagine that $1,500 working for you in a savings or investment strategy or being available to you in the event you have an emergency instead of working for the bank.  If you have more than one card, pay off the one with the highest interest first or see if you can transfer your balance from the higher interest card to the card with the lower interest charge.  It is important also to pay attention to what your card’s companies are charging you; their rates are variable not fixed, so you could be surprised if the interest charged on your balance goes up.  Avoid consumer debt as much as possible and you are more likely to be able to do what you want to do, when you want to do it.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.  This is a hypothetical example and is not representative of any specific investment.  Your results may vary.

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