4 Minute Read
Can we get a little personal for a second?
How much debt do you have?
Not sure? You’re not alone. According to a recent study by the Federal Reserve, Americans, on average, underestimate their credit card debt by about 40% and their student loans by about 25%.(1)
Lots of people don’t know how much they owe because they’re too afraid to open up the bills, don’t understand how it all works, or simply haven’t taken the time to add it all up.
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Other people underestimate their total because they think “good debt” doesn’t count. But here’s the deal: There’s no such thing as “good” debt. Dave Ramsey takes calls on The Dave Ramsey Show all the time from people who don’t even realize how much debt they have until he starts asking questions.
Our culture may say that certain kinds of borrowing aren’t real debt—but that’s just not true. Here are four “good debts” that need to be relabeled as plain, old, D-E-B-T.
You’ve probably heard mortgages are “good” debt. You can write off the interest on your taxes! Homes appreciate in value—so you’re “leveraging” your debt!
If you’re going to take out a home loan, you should follow some strict guidelines. But even then, any mortgage still involves risk. Your home’s value could drop, putting you underwater. You could face a catastrophe and not be able to pay your bill. Debt is debt. Putting 100% down—in cash—is always the better choice.
2. Car Payments
We Americans love our cars. We love them so much that every single day we walk onto car lots and drive off with brand-new vehicles—and huge car loans.
“Normal” says you can’t have a car without a loan and that new cars are the only “safe” option. So car notes become acceptable debt. If you can manage the $600 monthly payment, what’s the big deal?
But when you consider a car’s value tanks just by driving it off the lot, interest rates are usually pretty high, and loan periods are creeping higher and higher, suddenly it doesn’t seem so smart.(1)
Skip the new car and pay cash for a good, used one.
3. Student Loans
Here’s another example of what many consider worthwhile debt, but the truth is this: Student loans hurt more than help. They are the biggest roadblock to the financial success of this generation.
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Today’s 20-somethings grew up hearing: You can’t go to college without debt. Student loans are an investment in your future. You can’t get ahead without a fancy education.
The unfortunate result? Many college students take out loans without understanding they’ve just jumped into a deep pit with a nasty boa constrictor. Suddenly they’re looking at a lifetime of debt that makes buying a home, getting married, or starting a family way more difficult than it should be. Thanks for nothing, student loans.
If you have student loans, pay them off pronto. And if you’re considering taking out new loans, walk away. Save up and pay cash, or work your way through school instead.
4. Interest-Free “Deals”
The last time you needed to buy furniture, you probably heard the sales pitch: Buy today, and pay no interest for a full year! Ninety days same as cash!
That’s not debt, right? Not if you pay off that dining room set before the interest kicks in?
False. The salesman isn’t there to do you any favors. He knows the chances you’ll pay in full before 90 days are slim. The store is in business to make money. When you sign on the dotted line, they’re in for a profit.
The next time a salesperson tries to sucker you into one of these deals, offer less than the asking price and pay with cash. You’ll get a better price and avoid debt.
Are you ready to learn more sneaky ways marketers convince us we need debt—and how to beat them at their own game? We’ll show you that and so much more in our nine-lesson, money-management class called Financial Peace University.
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