Basic Personal Finance
The 2 types of Debt you should know
Not all debt is the same. There is Good Debt & Bad Debt
Everyone deals with debt sometime in their life, but not all debt is the same, there is good debt and bad debt.
Good Debt:
Mortgages, student loans, and small business loans are types of debt meant to help borrowers build wealth, earn more, and be financially secure.
- People take mortgages to help pay for a home and build a lucrative asset to create wealth.
- Student loans are used to help students pay for college, and students have the expectation their education will lead them to life with a higher income –hopefully enough to pay off the loan quickly.
Student Loan Debt
A common type of debt. Focusing on federal loans provided by the government, student loan debt starts 6 months after the you graduate college. There is unsubsidized and subsidized student loan debt.
- Unsubsidized Student Loans accumulates interest as soon as you receive the money
- Subsidized Student Loans accumulate interest after you graduate college.
There are many student loan forgiveness programs, but they often require you to have consistent payments on your loan along with good credit.
Mortgages
Mortgages help people cover the cost of paying for a home. The process can be arduous and confusing with the paperwork.
The main aspect of mortgages are amortization and prepayment penalties. Amortization is paying off a debt in equal installments. To help reduce the total cost of the loan, you can pay slightly more than the monthly amount. Some loans have a prepayment penalty of paying off a large chunk of the mortgage within 3 years of taking the loan.
Bad Debt:
Types of debt where you lose money and have little chance of earning more money in the end. Credit card debt, medical debt, auto titles debt are examples of bad debt where you lose money and gain nothing in the end.
Credit Card Debt:
Credit card debt occurs when you fail to pay the full account statement, and the remaining amount carries over to the next month.
Each credit card company is different with their interest rates for late payments and fees. Check with your credit card company to know more.
Medical Debt:
Medical debts are unique because you often cannot plan for health-related emergencies. One day you might sprain an ankle or break a bone or be diagnosed with a disease and face a couple thousand-dollar bill.
Dealing with Debt:
Handling debt can be overwhelming and there are some plans you can put into place to help relieve the stress.
The easiest way to avoid accumulating large debts is setting automatic bill payments for bills that way you do not have to worry about remembering to pay the bill on time and pay the bill the full amount each time. Autopay takes care of it for you.
Other methods involve paying the lowest debt first (Debt Snowball Method) or paying the debt with the highest interest rate (Debt Avalanche Method). NerdWallet has a great video explaining both.
In the end, the best plan for handling debt is the one you can do consistently.
NOTE: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
This was an excerpt from a book I’m writing on Personal Finance.
Summaries of each of 10 chapters will be posted in this manner. If you’re interested in the e-book, consider pre-ordering by May 23, 2023.
