Good debt vs. bad debt: make it work for you

Incarceration’s sister, bad debt has the most new-age slaves while interest is the warden/overseer. But there is good debt and bad debt, all you gotta do is flirt with her a little and she can work in your favor.

Bad debt

Money you owe, paid out of YOUR pocket, and charging you interest aka you are “Buying Money.” Handling bad debt can be a simple process if you stick with it.

List out your debt amounts, the minimum required payment for each, and their interest % (interest rate on your card can be found on your monthly statements.) You can list these debts by balances from smallest to largest.

Knocking out the smallest debt will be a quick/easy win. Winning is a great way to stay motivated. motivation keeps you on track of eliminating bad debt. However, if you’re good with staying motivated on your own then start with the debt that has the highest interest rate. On the debt with smallest balance- make the minimum monthly payment plus something extra i.e. $100. On all other debts make the minimum monthly payment (ideally plus $10) on each. Finally, when the first small debt is paid off, take what you were paying towards that and add it to your payments of your new smallest debt/debt #2.

I’ve created a template to make things easier for you and can be found here.

Cheat Code

If you split up your monthly credit card payments into 2 or 3 payments each month, you can bypass a portion of the interest charges and possibly increase your credit quicker. For example, instead of one $300 payment this month, do three $100 payments in the month or two $150 payments. Realize that holding a balance on your card is costing you some real money. That new ‘fit you caught on sale is not really on sale anymore cause you got charged interest or that chicken sandwich meal cost you $13.50 and not $8 cause it’s been sitting on your credit card.

Good debt

Money you borrow but someone else pays it for you i.e. rental property you own. For example, if your mortgage is $500/month and tenants pay you $900/month. Mortgage debt is paid by money from tenant and you get to pocket ~$400 (not including other home expenses.)

In some cases, folks with great credit will borrow money to lend out to others and make a profit. Let’s say the bank will let me borrow $50,000 at 4% interest that would usually cost someone else 9% interest. I could then lend that $50,000 to a small business or use for a business opportunity that would pay me 7.5% interest, it’d be enough for me make a profit of 3.5% interest and not have to do anything.

Often, I get the question whether to invest or pay down debt. In the scenario above you could get a cash flowing asset and use that money to pay down your debt, that way your paycheck doesn’t have to go towards paying down bad debt or could be used as additional payments to what you are already paying.

Tips to cut down on debt and expenses:

Crushed by student loans?

One of the best things you can do is consolidate those student loans into one and have a much lower payment/interest rate. Check out SoFi.

Phone bill higher than $60/month?

If you’re more than $60/month on a cell phone bill consider switching to T-Mobile for amazing rates and service. You don’t need to blow a bag for unlimited talk + data.

Is your car insurance is too damn high?

If you like you’re paying too much for car insurance, give them a call and let them know you’ve been shopping around and considering changing carriers. They’ll do what they can to keep your business and lower your rate!

Paid off your credit cards?

Lastly, when paying off a card don’t let them close the account due to non-use. It can negatively affect your credit score by lowering your available credit!

Have a lot of debt but also good credit?

Consider opening a new rewards credit card with 0% APR for 15 months. Do a balance transfer from your high interest credit cards to this new one and you are now paying your bad debt interest free! Note: this is NOT a good idea for people who can’t control their spending.

Category: Debt
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