For purposes of this discussion, I define bad debt as purchasing anything on credit that declines in value. Good debt involves purchasing something on credit that increases in value. But beware: bad debt can be camouflaged as good debt if it puts you in a difficult financial position where you’re unable to meet the payment obligations.
Many people at this time of year are about to be flooded with the Holiday and Christmas bills. When the credit card statements arrive in January, you may be asking yourself, “How can I get out of debt and why did I do this in the first place?” To get out of debt is one thing, but lets look at some reasons WHY people go into debt.
- They decide to buy something that costs a large amount of money and they want it now. Car loans, vacations, and consumable items that lose their value almost instantly are the usual culprits.
- They feel pressured to keep up with the Joneses. When the neighbor buys a new car, they feel the need to park a newer one in the driveway. When their children’s friends have the newest electronic gizmo, they don’t want to appear like a Scrooge, so they buy one — on credit.
- They are unable or unwilling to plan for those inevitable emergencies such as the car needing new tires, the air conditioner dying in August, or the accident that keeps them from working full time.
- They put off planning for long term (also inevitable) events such as college tuition for the children, braces for the children’s teeth, home and vehicle maintenance, and the biggie — retirement.
So what should you and I do? In a word PLAN. Remember the old saying: Those who fail to plan, actually plan to fail.
Plan next year’s Christmas spending by setting up an automatic deposit to a Christmas Club account. Sure, it doesn’t earn much interest, but putting aside just $10 per week will make next year’s Christmas a lot more stress free.
Plan to purchase your next vehicle by keeping the one you have a little longer after you pay it off. If you’re currently paying $450 per month, continue those payments after the car loan is paid off, only pay them to a high yield savings account (automatically, of course). Assuming 4% interest, in two years you will have over $11,000 for your next car. Wait three years and you’ll have over $16,500 to buy a vehicle. Four years? $22,000. Five years? $27,500. What kind of car could you get if you had $27,500 in cash to spend on one?
Plan to have an emergency every year. Something usually goes wrong so plan for it by establishing an emergency fund. Many financial guru’s recommend $1,000. Depending on the type of emergencies you have, you may need to adjust this number up a bit. Make sure you have a disability policy on the income earner(s) in your family.
Plan your short term expenditures. If you pay your auto insurance quarterly, make regular deposits along the way so you don’t have to come up with a large lump sum. Apply this principle to your personal property taxes, family vacations, vehicle maintenance, annual condo fees, annual termite inspections, home improvements, etc.
Plan for the long term. You know these things are coming. One day, your retirement will be just around the corner and you will begin to panic. Go ahead and panic now if it helps! Plan for these coming events by consistently setting aside money into some type of investment vehicle. Compounding even a small amount of money over time will produce large gains in your personal portfolio. Everyone has a personal portfolio, whether anything is in it or not is up to you. Seek out sound wisdom from those who, by virtue of experience, education, or profession, are able to help you make long term plans to succeed.
Make the decision today to plan your future, otherwise you could be only planning to fail. Your goal is to even out your expenditures so there are fewer big expenditures that leave you buying groceries with your Mastercard. Jack Welch, the former CEO of General Electric, was a master at smoothing out GE’s profit picture so that investors saw consistent steady growth. You want to do the same thing on a personal level. Even out your expenditures so that when the big one hits, it is easily covered by your plan.