Debt management is an important skill to master, no matter what life stage you are in. As part of a mature family, you probably have established yourself in a career, but you may also have huge costs in front of you, such as your kids’ college expenses and your retirement. By understanding the difference between smart debt and dumb debt, you can become an expert at debt management and progress toward meeting your financial goals.
Smart debt
There are times when it may be more than just necessary to acquire debt, it may also be beneficial. Debt like this is known as smart debt. Smart debt typically leaves you better off financially than when you started because it leaves you with an asset that is worth the cost of the loan, or possibly even more. For example, a mortgage or student loan is considered smart debt. As a part of learning debt management, you need to understand the total cost of a loan (the principal, interest and fees) as well as whether the loan will help you or hurt you in the future.
Dumb debt
Dumb debt is the easiest type of debt to fall into, and it usually results from poor debt management. Dumb debt leaves you owing money, with nothing to show for it. This often occurs when you buy things on credit that you really cannot afford. It involves taking too long to pay off a debt, so you wind up paying an exorbitant amount in interest -- sometimes considerably more than the original cost of what you bought. Dumb debt also occurs when you are still paying for something long after you are done using it, or don’t have it anymore. A lack of good debt management can lead to the acquisition of dumb debt, which often results in stress, a limited budget and sacrificing long-term financial goals.
Looming financial obligations
As your family grows older, your financial obligations grow bigger. As your children become teenagers, you may want to buy them cars. College is also just around the corner, with your retirement approaching after that. These are big expenses that require good debt management. Plan carefully so that you can avoid amassing dumb debt when it comes to these expenses. For example, don’t borrow against your retirement to pay for your kids’ college. Your kids have their financial future ahead of them, and can always get a student loan with great rates. It can be good debt management to use your home equity to help pay for your kids’ college. Be aware that using your home equity now means it will not be available as profit if you sell your home. Talking with a financial planner at this stage of your life can be one of the best moves you can make when it comes to learning about good debt management.
Changing your mortgage
As you focus on debt management, consider your mortgage. If you have been in the same home for many years, chances are, interest rates have changed. You also may want to change the term of your mortgage so that you can have lower monthly payments. These can be good reasons to refinance. This type of debt is smart debt and falls into the category of wise debt management if refinancing saves you money or helps you achieve some important goals. This includes paying for college or home improvements. Refinancing, however, becomes dumb debt if you use the money for everyday or unnecessary expenses. Be smart if making this choice.
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