The Double Whammy of Debt

Please note it is your responsibility to evaluate the accuracy, completeness and usefulness of any information, opinion or advice contained in the content below.

The Double Whammy of Debt by Spencer Ray

It is important to realize how debt affects your net worth. The classic Net Worth formula is:

Net Worth = Assets – Liabilities

Liabilities are your debts. These debts reduce your net worth; especially “bad debt”. Good debt is used to purchase assets that increase in value, while bad debt is used on assets that decrease in value.

Although we have here classified debt as “good” and “bad”, all debt immediately decreases your net worth. And, you are also responsible for paying interest, which reduces the amount that you could be saving! This is a double whammy!

So, debt should not be used if at all possible. A home loan is the only debt that you will probably NEED to have. An education would also be an asset that would increase in value; however, debt should still be avoided if possible. In extreme circumstances, debt should only be used to purchase assets that will increase in value. The person, that pays good old cash for a car, education, furniture, electronics, and other items; will up with more peace of mind and usually more money in the bank.

Your credit cards and other debt should not be used to purchase groceries, gas, TVs, or other consumer goods.

However, in today’s world credit cards are so readily attainable and so convenient to use, it can be extremely easy to let your debts get out of control.

The Cause of Debt

In the days of our parents or grandparents, credit cards were rarely if ever used. Now the use of credit cards for basic items such as food and utilities is commonplace. Some other reasons that may be causing the high credit cards bills of America:

Nearly all debt problems fall into these categories. Unfortunately, most debt problems are caused by the last 3 and not the first 3.

The Solution of Debt

The first solution to debt is to stop accumulating more of it! Stop using your credit cards and start paying with cash or a debit card. This will allow you to stop the bleeding of money and begin to heal the debt wounds that you may have. Here are a few tips to eliminating your credit card spending:

Pay cash

Keep a written record of any credit card spending and pay it off before the end of the month.
Limit the number of credit cards that you have (this will also improve your credit score).
Don’t accept credit cards offers at retail stores just because of a discount or low introductory rate.
Don’t cash checks that you receive in the mail (from banks or other institutions).

Most importantly, start a budget…and stick to it! Frequently review how much you are spending and make sure not to buy anything on credit. Credit cards not only make you spend more (because of interest) on everything you purchase; it also prevents you from investing that money elsewhere.

For example, let’s take a look at Joe and Tammy. Both Joe and Tammy purchased the exact same TV for $1,500. However, Tammy had saved up for the purchase and paid cash, while Joe bought it the first time he saw it and used the store credit card he was offered at 22% annual interest rate. At $50 a month, it took Joe 4 years to pay for his TV.

While Tammy paid $1,500 for her TV, Joe paid a total of $2,200 ($1,500 plus interest over 4 years). So, Joe not only paid $700 more for his TV than Tammy, he also lost the opportunity to invest the $700 that he would have saved had he planned ahead.

Unfortunately, impulsive buyers do this over and over again and they end up paying thousands and thousands of dollars more for the same items that their neighbors saved up and bought.

For a continuation of this article, and a more detailed look at how to get out of debt and improve your credit, please see the resources below.

Take the 30 day Financial Challenge at Keyblast.com! This article is a small portion of the 30-day financial challenge. To access lots of free information, tools, and to see what the challenge is all about, visit Keyblast.com

Spencer has a BA in Finance, an MBA, and is currently a Commercial Banker advising Business owners on Business and Personal financial issues.

Chrysler: Warns it needs loan to stay in business - Detroit News

3 Dec 2008 at 3:36am
Chrysler LLC, the smallest and weakest of Detroit's automakers, said it may not be able to keep its business going beyond March if it does not obtain $7 billion in bridge loans from the government this month. In a plan sent to Congress on Tuesday to ...

How to make the best of a debt consolidation loan - MyFinances.co.uk

29 Nov 2008 at 7:54pm
When you start finding it difficult to keep up with your monthly bills because you have so many different accounts to pay each month, it may be a good idea to consider a debt consolidation loan. Debt consolidation loans help you manage your debt ...

Student Debt Consolidation Loans ? Students can Stack Up Multiple ... - Best...

24 Nov 2008 at 4:54pm
Students face many problems during their study life. They have to finance their tuition fee, their books, clothes and many other things... With the ease which one gets a loan these days, it is very easy to fall into the trap of endless debts ...

Get help managing and consolidating debt - The State

29 Nov 2008 at 9:13pm
Mounting debt can put ever-increasing pressure on a household?s finances and lead to possible long-term credit problems. Finding a solution to personal debt is not always easy. But it can be done, often through a careful debt management and ...

Putting debt on the long finger - Independent

27 Nov 2008 at 11:46pm
Share I HAVE a number of debts - car loan, mortgage, credit card balances and a credit union loan. Servicing these different loans is costing me an arm and a leg every month. I was told by a friend that a good way of dealing with this problem is to ...

Tagged:

annual, Budgeting, cards, consumer, credit, Credit Card, Credit Score, debt, free, get out of debt, money, Planning, rent, resources, score, Spending

Free Newsletter

Sign up for the free Daily newsletter, filled with tips and ideas on avoiding credit card debt, credit history, tips on getting out of credit card debt, and more. Your email address will be kept confidential and won't be shared. Easily unsubscribe at any time.

If you enjoy the free information available on this site, you're sure to enjoy the free newsletter as well:

Share and Enjoy:

December 06 2007 06:35 am | Debt Solutions and No More Debt

Trackback URI | Comments RSS

No Debt Anymore .org

Advice on credit repair, credit reports and debt solutions