Excessive use of debt can be a major hindrance to your financial independence. Although sometimes unavoidable, here are four debts you should try to avoid as much as you can.
Credit Card Debt
Most of our debt problems come from the overuse or misuse of credit cards. Here are some interesting stats from the Federal Reserve’s latest Survey of Consumer Finances for 2007.
- 46% of families have a credit card balance
- the average value of credit card balances for families with holdings was $7,300
If you’re looking for resources to help get out of debt, check out these articles here.
Credit Card Debt Problem? Essential Resources to Beat Credit Card Debt
Yes, cars are a necessity for most people. We need them to get to work, take the kids to school, pick up groceries, and run other errands. Yet we tend to go overboard when it comes to car purchases.
It’s one thing to borrow money to purchase a car. In fact, I did this myself for the car I drive currently.
But the funny thing is that I actually had money saved up to pay off the balance in full. It wasn’t until the loan was almost paid off that I finally smartened up and paid the remaining balance in full.
The moral of this story is that I was paying interest to the car company, when I could’ve put that money in a savings account that would’ve paid me interest!
But borrowing money to lease a car that you use temporarily is a double-whammy. Not only do you get in debt, but you have nothing to show for it if you pay it off!
Some also get a new car and new loan as soon as the current one is paid off. In fact, before they actually need a new vehicle, they start wanting a new one. To respond, they do what it takes to purchase the new car, including getting a high-interest-rate loan that’ll take a long time to repay.
Instead of taking on an auto loan, how about learning how to buy your next car with cash?
Because there is a loan provision with the 401k, people may think there aren’t any consequences to doing so. However, here are some good reasons not to take out a loan.
Regardless of fault, if you leave your job before the loan is repaid, you then have only 60 days to pay off the loan. Otherwise, it’s considered a withdrawal, which will be taxed at your regular income tax rate. If you haven’t reached age 59 1/2, you’ll also have to pay a 10% penalty on top of that.
Not only do you need to repay this loan, but now the money is no longer invested in your account and working for you. You’ll lose out on additional interest, dividends, and capital gains.
And if you borrow from your 401k once, it may be too easy to justify borrowing from it again in the future. Thus, the habit of saving for the things you want and need will be lost. If at all possible, retirement money should not be touched until you retire.
These short-term loans are used to cover someone’s expenses until their next payday. Payment is due in full at the borrower’s next paycheck, which is usually two weeks.
However, borrowing comes at a heft price. The interest charges range from 15 to 30% for the two-week period. This may sound bad enough, but if you calculate the APR, the numbers come out to 390 to 780% interest!
So these are four debts to stay away from as much as you can. If you do this, your chances of reaching your financial goals will improve greatly.
Are you taking steps to get out of debt?
Photo by SqueakyMarmot