The cost of carrying too much debt
This weekend, our family was chatting with some friends and the topic of debt came up. Since our girls are of the age to be going to college, there was a long discussion around financing educational costs and weighing the pros and cons of taking on that financing. The discussion took a turn towards identifying ‘good debt’ & ‘bad debt’. Here is our family’s viewpoint on debt.
First, not all debt is bad. Taking out a mortgage for a home is not bad, and neither is taking out a loan for a vehicle, if it is budgeted in to monthly expenses. In most situations, educational debt should be viewed as neutral. It is an investment in your future, but it is also a guaranteed burden when you are starting your professional career & investing journey.
Most other debt is bad, in my view. Avoid any other debt at all costs, if you want to win with your investing strategy.
Paying down debt should be a top priority, if you have any today, especially considering most debt is carried with interest rates between 7 and 29%, depending on the type of debt. Interest earned on your investments can be less than interest accrued with credit debt. Since debt can compound faster than investments, carrying the wrong kind of debt can pave the road to a financial train wreck.
How much debt is reasonable to carry? 30% of your income is a number that many people use as a starting benchmark (link to Investopedia article). That 30% would include your mortgage, vehicle and other credit all added up. As an example, if you have an income of $50,000 / yr, then 30% of that would be about $1,250 / month. That could look something like $750 for rent, $350 for a car payment, and the remainder would leave $150 for other credit, if you choose to have a credit card.
With a good plan, getting out of debt is within reach.
If you want to get a clearer picture of just how damaging debt can be, use the Debt Reduction Calculator below. Plug in all your car loans, student loans, credit cards, along with the minimum payments and see how long it takes for you to pay them off. Want to see how long it will take to pay off those student loans and how much it really costs? You can utilize the “Add Another Debt” button to see all your debt calculated in about 90 seconds.
In the Getting started video, I said “time is your greatest ally when it comes to investing”. In regards to debt, time can also be your greatest enemy, so you should avoid it at all costs, if you are able.
After you have plugged in your debt, or even just played around to see what could happen if you took on more debt, feel free to leave a comment below. We would love to hear your thoughts.
If you are reading this blog on social media, check out our newly created website, Gregs Dive, as we continue to build out more tools for young adults to make informed financial decisions that have a positive impact on their future.
