How to manage your debt wisely, How do we do this? Or know what debt is good, and what debt is bad?
Debt became “popularly bad” starting in the 1980s with interest rates on homes reaching an average of 18.45% in October of 1981. In 1981, a 30-year mortgage of $300,000 had a monthly payment of $4,632 vs. the same $300,000 mortgage today at an interest rate of 4% and a monthly payment of $1,418. (http://www.fedprimerate.com/mortgage_rates.htm)
So does that mean that home ownership debt is “good” in today’s market? Well, it depends. For most Americans, the debt doesn’t end here. As interest rates have now fallen to historic lows, the money we used to have to spend on a mortgage now goes to credit cards, lines of credit, personal lines, student loans, and other consumption backed debt. Additional debt backed consumption often equates to a higher percentage of household income than the higher mortgage rates of the past.
“In an ideal world we would never have debt. That same ideal world has no taxes, inflation, planned obsolescence, costs for technology changes, market volatility, sickness, job losses, emergency room bills, or transmission replacement costs among other things,” said RFG Founder and Managing Partner, Ian Rice. “It’s important to not punish yourself psychologically for being in a season of life that requires some steps backwards financially. However, if the season lasts longer than a few months, you should reflect on what you’re doing and make changes.”
In order to wisely manage debt, we have to first start with breaking down “good” debt vs. “bad” debt. Some characteristics of good debt include: Low interest rate, asset backed, long amortization, and tax-deductible interest. Characteristics of bad debt can include: High interest rate, not backed by an asset, short amortization, and non-deductible interest.
Our goal is to get rid of bad debt, make good debt, better debt, and eventually, only use debt as an option for leveraging other people’s money to our benefit. Regardless of how much debt you have, you have too much if you’re unable to annually save 15-20% of your income for the future, or any unforeseen emergencies life throws your way.
To learn more about RFG’s financial planning services and how they can help you manage your debt wisely, please reach out to Angela Hood.
About Rice Financial Group
Since 2009, Rice Financial Group has believed in creating long term relationships with the families and businesses we serve. By focusing on educating our clients, we make the decision process regarding your finances as simple as possible. We are committed to empowering our clients to grow and protect all that they’ve worked hard for so they can focus on the things in life that are most important to them. Securities, investment advisory and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC., member SIPC. For more information on Rice Financial Group, visit their website, http://www.ricefg.com.
Published at Sat, 10 Aug 2019 07:00:00 +0000