Money tip – Debt
The debt category lists personal finance tips that can help you with debt.
Get out of debt
One of the best personal finance tips is to get out of debt. There is no other way to guarantee a rate of return back to you than by paying off your debt. Whatever your interest rate is, is the return to yourself when your debt is paid off. Get mad at your debt. Pay it off asap.
Pay off your credit cards in full every month
If you use credit cards, pay them off in full every month. It is a myth that you need to keep a balance to build your credit. You can build your credit by using a credit card and paying it off in full every month. Credit card companies would not be in business if everyone paid off their cards in full every month. Do not let that be you!
Pay off your student loans
If you have student loans, pay them off. Student loans are not collateralized and cannot usually be discharged in bankruptcy. This means you are most likely going to be stuck with your student loans unless you pay them off. If you qualify for a forgiveness program for working in public service, that is also an option to explore. Get down to business now and make sacrifices so you can get out of student loan debt. It is not “good debt.” It is debt that needs to go away.
Be careful with income-driven repayment plans
Be careful using an income driven repayment plan to pay off your student loans. People love to recommend them, but the reality is that if you are not repaying your loans at a rate every month that covers your interest, then your debt will increase over time. You do not want to turn around in 20 years and owe double what you started with.
Stay out of debt
Once you are out of debt, make it a commitment to stay out of debt (this is especially important if you are a spender). You cannot do anything about the debt you got into in the past, but you can avoid getting into more debt in the future.
Use debt ratios as guidance
Compare your debt to a few standard debt ratios. In general, debt ratios to consider are:
- Consumer debt should be < 20% of net income
- Housing debt should be < 28% of gross income
- Total debt should be < 36% of gross income
Do not co-sign a loan
Do not borrow from your retirement accounts
A good rule of thumb is not to borrow from your retirement accounts unless you absolutely must. There can be tax consequences and penalties when you borrow from your retirement accounts that can make the transaction more costly than beneficial.
Until next time.
The MoneyShop Team
This article has been prepared for information purposes only and it does not constitute legal, financial, or medical advice. The publication, journalist, and companies or individuals providing commentary cannot be held liable in any way. Readers are advised to seek legal, financial, or medical advice where appropriate.