This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Sunday, August 26, 2007

Debt is not your friend

Posted by Matt
My last post was about balancing your budget and living within your means. The biggest hurdle for some people to get to that point is the amount of money they have to spend each month on what is called "debt service". This is just a nice way of saying that the things you purchase on credit own YOU.

If your "extra" income is going to pay off your debts, then you might not be to the point yet where your income is greater than your expenses (they should be at least equal). This is an okay place to be temporarily. Just make sure that you have cut your expenses as aggressively as possible to maximize the rate at which you are paying off your debt, and, above all, stop spending!

Jumping ahead a little, you should also be starting to think about your savings. Even if you are putting as much money as possible toward your debt, try to maintain a small cushion of cash in a savings account. That will allow you to stay on track should any unavoidable expenses (think essential car repairs or prescription medications) pop up unexpectedly. You're not really saving yet, just setting aside a cushion.

The accepted wisdom is that you should pay off what is considered your "bad debt" (mostly the high interest stuff like credit cards) first, but my opinion is that you should consider eliminating student loans and car loans, too, ahead of schedule, if possible (mortgages come later).

I discovered that personal finance progress seemed to accelerate as long as I just kept making smart decisions. Balancing your budget might only get you slightly ahead each month, but pay off a creditor and suddenly you have even more money available and your credit score is rising, which opens even more doors.

Once I had my new job, a paid for used car and the promissory notes from my student loans in hand, I really started feeling great financially. I could finally start SAVING (discussed in my next post.)

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