“What I am about to share,” Dr. DuBois replied, “you would do well to write on your heart and place in your purse. Many a ruined man dates his downfall from the day he began buying what he did not need. If you are in debt, part of you belongs to your creditors. To whom you give your money, you give your power.”
Unfortunately, Dr. DuBois’ advice is relevant to the vast majority of Americans. 87% of U.S. households are currently carrying debt outside of mortgages. Myfico.com reports that, on average, today’s consumer has a total of 13 credit obligations on record at a credit bureau. These include credit cards and installment loans.(2)
First let’s break debt into bad debt and better debt. Better debt is debt you use to buy an appreciating asset. Bad debt is everything else. So, for example, better debt would include your mortgage, student loans (for yourself, not for your kids), and debt to buy a business or investment. Bad debt includes home equity loans, home improvement loans, car loans and all department store and credit card debt.
So just how much bad debt are we talking about? According to the latest statistics on consumer credit from the Federal Reserve, American consumers owe about $18,654 per household, a figure not including mortgage debt. (1)
Warren Buffet, one of the most notable investors in the world warns, “When the tide goes out, we find out who has been swimming naked.” Since the recession has hit, American families have felt the strain of being overextended.
Before you retire, get rid of all bad debt. You cannot be financially independent if you still owe money to creditors. I have three simple guidelines to keep in mind when it comes to debt:
- Change your attitude about money-just because you have it doesn’t mean you spend it.
- Be entrepreneurial-look for other ways to make money outside of your job.
- Save for what you want-do not buy things on credit.
If you’re going to get rid of all bad debt, 債務舒緩 you’ve got to have a plan. First, list out all the bad debts you have along with each corresponding interest rate and monthly payment. Second, separate the secured debt from unsecured debt. Secured debt is backed by an underlying asset. If you fail to pay, the lending institution can take the asset from you. Common examples include auto loans and mortgages.
Unsecured debt has no tangible item on the line as collateral, so it usually comes with a higher interest rate. Personal loans and credit cards are the most common types of unsecured debt. Student loans are a little tricky. It seems as though it should be classified as unsecured debt, since the bank cannot take back your education and there is no collateral; however, stringent laws apply to student loan debt. For example, it is not dischargeable in bankruptcy, so student loans should be considered secured debt.
Next, rank each secured debt from highest interest rate to lowest. Your secured debts should be paid first, since you do not want to face repossession or legal judgments.