JoGirl on a Natural High: Getting Rid of Bad Debts!
We hear all the time about good debt versus bad debt – but do you really know the difference between the two? And exactly how much of each is in your life? In the simplest terms possible, good debt is a debt that will (eventually) create wealth or return for you in some way, you know, real estate mortgages, loans to buy other solid investments, loans that might be helping you grow your business and even loans that are helping you pay off your bad debt more efficiently. Of all of these, real estate “good debt” is by far the most common – essentially, you owe plenty of money to the bank, but that’s a good thing, because you’re hopefully getting equity in a home or investment property, and hopefully that real estate asset is increasing in value … you get the drift on good debt. Bad debt is a little slipperier than that. Essentially, bad debt is debt that doesn’t do anything for you (besides usually a bit of fun at the time!) The obvious monster here is credit card debt, which just eats away at your wealth, and does absolutely nothing for your future capacity to be rich. The horror of compound interest means you are paying off just the interest on the debt more often than not, which is definitely bad debt. Personal loans for assets that depreciate, like cars, boats, holidays, etc are also bad debt. Overdrafts are bad debt. Anything you owe that isn’t going to net you money in the future is bad debt.
So, do a bad debt audit. I know, I know, scary, but get an exact figure on everything you owe that’s doing nothing for you or for your future wealth. Be honest with yourself – include store cards, and ‘unofficial’ loans. Add up everything you owe that’s never going to get you anything (except eventually out of debt) and then work out a way to neutralise that debt – make a plan to pay it off, consolidate it, get rid of it. Once you’ve done that, you’ll feel better, I promise.
Denise @ Raw Brides January 15, 2010 at 7:17 pm
Our bad debt is pretty much from our wedding – make that two weddings and a big honeymoon in between.
We had a great time, but it’s not fun being in debt afterwards…..
You have inspired me though to get organised. I’ve got all my debts listed out again now, organised by interest rate and min payment – working out which ones to juggle to 0% and which to snowball payments on.
I do feel better – especially since the situation is not as bad as I thought (the not knowing is scary!) and the goal is to pay off all of them by the end of the year.
jo January 16, 2010 at 11:21 am
Yeah, the list of debts that aren’t accumulating interest can go at the bottom of the priority – and it is totally worth juggling anything you can on 0% interest. You’ll be able to pay that off by the end of the year for sure, if you’re smart about it. Be good to do another little audit at the start of the new financial year to make sure you’re on track.
Borrowing What You Need | Personal financial advice & tips for women August 14, 2010 at 9:14 pm
[...] gals, here’s a little more Good Debt, Bad Debt fun. A guy at work is getting married. He doesn’t want to go further into credit card debt [...]