Debt management is an important skill to master, no matter what life stage you are in. As a young single person, you are still laying the foundation for your future financial life. Understanding the difference between smart debt and dumb debt enables you to become an expert at debt management.
Smart debt
There are times when acquiring debt is unavoidable. Sometimes it may even be beneficial. This type of debt is known as smart debt -- one that typically leaves you with an asset that was worth the cost of the loan. For example, a mortgage or student loan is considered smart debt. As a part of learning good 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 long run.
Dumb debt
Dumb debt is the easiest type of debt to fall into and usually results from neglecting debt management. Dumb debt occurs when you buy things on credit that you really cannot afford. It also involves taking too long to pay off a debt, so you wind up paying an exorbitant amount of interest -- sometimes considerably more than the original cost of your purchase. Dumb debt also involves paying for something long after you use it or no longer have it. Ineffective debt management often results in dumb debt, which can result in living with stress and a limited budget, and sometimes even the means sacrificing long-term financial goals.
Student loans
You may have your degree, but chances are you are still paying for it. Good debt management can help you find the best way to pay off your student loans. Although student loans are considered smart debt, you still need to be careful about repaying them responsibly since your payment history affects your credit rating. Remember, even though this is smart debt, you can turn it into dumb debt if you take too long to repay it. Use your debt management skills to pay it off quickly, but if you have other debts with higher interest rates, your student loans may not be able to be first priority.
Credit cards
Now that you are employed and have a source of income, it can be very tempting to buy things you want, even if you cannot afford them. Credit cards add to that temptation and make debt management tricky. Surrounded by people who may be a little further along in their careers, and therefore making more, it can be hard not to try to match their lifestyle. But that is a surefire way to acquire dumb debt. By using a credit card to make purchases that you cannot afford, you trap yourself into a tougher financial situation that makes debt management more difficult. Be patient, and avoid using credit cards for dumb debt. Instead, save up for these types of purchases, and pay cash.
Big purchases
As a young single person, you may have several big purchases ahead of you that require responsible debt management on your part. Maybe you need to buy a car or a house. Perhaps you want to take a real vacation. Or maybe there are wedding bells in your future. By using proper debt management, you can make these purchases and still avoid the trap of dumb debt. You can use a savings or investment account to help you to save money for many of these expenses. For a home, though, you will most likely need a mortgage. Investigate different mortgage products to find the one that best meets your needs. Also remember to begin saving for retirement. Enroll in the 401K program at your work, or talk with a financial advisor about the best way to invest your money. It is important to focus on this aspect of debt management now, so you are adequately prepared for the future.
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