Do you find yourself drowning in debt? You’re not the only one. Benjamin Franklin once said, “Beware of little expenses; a small leak will sink a great ship.” Many of us struggle with understanding the best approach to handling our debt. However, preparing for expenses with
the right budget not only allows us to manage our debt but allows us to build a better future. Today, we’ll explore ways to manage our debt and how to build the right budget for our finances.
The Good versus The Bad
It may be surprising to learn that not all debt is bad. In fact, there are two types of debt: good debt and bad debt. Each type comes with its own positive and negative consequences to our finances. Let’s break down their differences to better understand their impact on our budgets.
Good debt could be classified as having a mortgage on your home or having one on an investment property. In an ideal world, you would have put a 25% down payment. However, these types of investments are considered good because their value appreciates over time. If you can afford the monthly payments and have a sizable down payment, then this would be positive debt.
Alternatively, bad debt would be classified as credit cards or loans. Unlike mortgages and
investment properties, this type of debt is classified as bad because its value does not
appreciate over time. Let’s examine each of these in a little more detail.
Credit cards can be scary because of the high interest rates when the amount isn’t paid in full each month. In the long run, you’ll end up paying a significantly higher price for an item due to the amount of interest on top of the initial price. If you’re having to pay double digit interest rates for years, it’ll be difficult for you to get ahead of the game.
Next is car loans. In a perfect world, you would look to buy something that is a few years old where you could get 50% (or more) off the sticker price so you’re able to pay in cash instead of a loan. However, this is not always an option for buyers. As a result, consumers rely on car loans and end up paying thousands of dollars more due to interest rates.
Similarly, some consumers get boat loans. Boats are absolutely a lot of fun, but they can lose as much as 50% of their value in as little as two or three years. Combine that with the upkeep, owning a boat may not be the best investment for you, especially if you require a loan.
Another common loan in today’s society? Student loans. Now this can be classified as a type of good debt since investing in your education is an asset that will appreciate over time.
Unfortunately, student loans can also have high interest or variable interest so paying these off quickly would be the most ideal scenario.
Managing Your Debt
For any debt you currently have, it is recommended to pay off bad debt first. To start, pay off the highest interest rates completely before moving to the next one. In addition, cutting significant chunks into student loan debt at the same time is best, as you are able to do so. Look over what your current debt and allocate a portion of your income to paying off debt so you’re
not having to deal with that additional interest burden. Even better, implementing and sticking to a budget prevents those financial leaks and overwhelming sea of debt.
Building the Right Budget
The not-so-secret way to prevent getting into debt is budgeting. There are many different ways to create a budget:
- The Cash Envelope Budget
- The Zero-Based Budget
- The Anti-Budget
- The Reverse Budget
Reverse budgeting is recommended by the David Adams Wealth Group because it’s a simple approach that allows you to keep a budget, but not have to track every single expense on a daily basis with spreadsheets and apps. So, what exactly is reverse budgeting?
At the David Adams Wealth Group, our reverse budgeting philosophy simplifies managing finances for our clients. Don’t spend all your money and neglect your financial plan. With reverse budgeting, you pay yourself first. This means you’re able to contribute to your necessary expenses and savings, and use whatever money remains however you want. A budget helps you allocate your money which is even more important if you have to pay off and/or eliminate debt. Managing debt is vital to retiring while you work since you won’t be able to save the money you need to if you’re having to pay off debt. To learn more about reverse budgeting and managing your debt, grab a copy of The Currency of Time for in-depth advice on how to best manage your finances.
Debt happens, but don’t allow your past mistakes to rob you of your future goals. The right type of budget will help you move forward with a life of retiring while you work and provide the opportunity to create memories and experiences with the money (and interest) you saved.
If you would like more information about creating your perfect budget and managing your debt in a healthy way, contact the David Adams Wealth Group. We would be happy to assist you on your financial journey.
Any opinions are those of the author and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making a decision, and it does not constitute a recommendation. All opinions are as of this date and are subject to change without notice.