29 Jan Habits for Building Wealth #2
Habit #2: Avoid Bad Debt
Imagine buying a house without asking the price.
That’s essentially what you’re doing if you take out a loan or rack up credit card bills without fully understanding what you’ll actually pay to pay off that debt.
Don’t Borrow Trouble
Building wealth means understanding the true cost of borrowing money. Because it’s not just the amount of a purchase or loan. It’s the interest rate on what you owe. So, add up the debt plus the interest. If it’s more than you want to pay for the item today, reconsider.
In short: Avoid Bad Debt.
Debt: The Good, the Bad & the Ugly
Take vacations – and couldn’t we all use one?
Book a $5,000 trip on plastic at 19% interest. Pay the minimum and it will take you 11 years to ditch that debt – plus you’ll pay enough interest to fund another getaway.
Is one week of fun worth 11 years of payback?
• Save up for your vacation before you go.
• Set a travel budget and stick to it.
• Return home rested, relaxed and debt-free.
Is “good debt” a contradiction in terms? Not always.
For more on “good” vs. “bad” debt, click here.
Hop Off the Hamster Wheel of Debt
What if you’ve already run up your credit cards and you’re struggling to pay them down? You need to make destroying that debt an urgent priority…now.
Where to start?
• List all of your credit cards with their interest rates.
• Take the highest rate card and pay as much as you can on that one each month, while also making at least the minimum payment on the others.
• Once you retire the largest debt, roll down to the next highest card, and the next.
Lather, rinse, repeat.
Financial guru Dave Ramsey calls this “The Debt Snowball Method” – read all about it here.
And do yourself a favor: cool your spending to shrink your credit card bills even faster. Continuing to add debt while trying to reduce it is like ordering a Diet Coke with a cheeseburger and fries. Don’t sabotage yourself.
Minimize to Maximize
Of course, some experts – like Washington Postcolumnist Michelle Singletary – believe all debt is bad. But if your goal is to build wealth, remember:
• Minimize high-interest credit (“bad debt”).
• Maximize saving for “needs” (“good debt”).
• Never go into debt for “wants.”
This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Traci Richmond, CFP® and not necessarily those of RJFS or Raymond James. Raymond James does not provide tax or legal services. Please discuss tax or legal matters with the appropriate professionals. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.
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