We often hear that all debt is bad debt, but that just isn't true...
We often hear that debt is a bad thing. While living outside your means is a problem, there are some types of debt which help couples reach greater financial goals and build wealth.
"Still, even with this knowledge, many couples get into arguments regarding whether debt is a good thing and how much debt is too much."
Debt is considered good when it allows for the growth of income or wealth. Examples are education loans, loans for the purchase of a home, and business loans for the growth of a business.
Debt is considered bad when it allows folks to spend outside of their means or to spend on items which rapidly depreciate (do not hold their value). Examples here are credit card debt and car loans.
Still, even with this knowledge, many couples get into arguments regarding whether debt is a good thing and how much debt is too much.
Here are some guidelines and tips to help couples master good and bad debt well starting now:
Look at your debt balances together. Create a document which records the monthly balances of debt. My experience with couples is they have no idea what their debt balance is, let alone whether it is good debt or bad debt.
Separate into the categories of good debt and bad debt. Now that you know your debt, you can’t act like you don’t. Plan to reduce the bad debt by limiting spending and allocating more resources to paying it down. When you can visually see your balances of bad debt go down because of teamwork, it is very gratifying and motivating.
Credit card debt is not necessarily bad if you able to pay off the balance each month. Many cards provide perks and advantage which are worthwhile. That said, you are paying dearly for these if you are not paying off the balance every month due to the interest rate charge to your card when you carry a balance. Plan as a couple about what you can do to keep your spending on credit cards within your means so that you can enjoy your perks without overpaying for them.
Auto loans are considered “bad” debt if they are used to purchase a new car – the car you buy will lose value the minute you drive it off the lot. If you must use an auto loan for a car, avoid the temptation of a new car, make a large down payment, choose a lower interest rate model/manufacturer, choose a shorter term (no longer than 48 months), and add to the payments to pay it off faster. This does take some teamwork and planning for couples.
Consolidation loans are a bit of a gray area – they can combine consumer debt so that there is one payment and one loan to keep track of. Additionally, these loans can pay down debt faster provided there is discipline. On the other hand, they can give the illusion of being “debt free” because there is an open credit line on the credit cards. Couples should thoroughly discuss accountability for credit card spending before taking a consolidation loan so that their debt balances don’t balloon with the consolidation loan in addition to racking up credit card balance.
Of course, if it were easy to follow the steps above, all couples would do it. Sometimes couples need additional support to pay down the bad kind of debt because of the emotional reasons which cause them to get into debt.
That’s where Financially Fit Couples can help you! Financially Fit Couples will provide the practical instruction to improve finances while tackling the emotional obstacles and negative communication which often get in the way of finding a resolution.
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