Living debt–free can be simplified into one rule: spend less than you earn. Yet, credit cards, education loans and mortgages have made this simple rule more difficult to follow making it more acceptable for Americans to live with large amounts of debt.
Getting out of debt
While a certain amount of debt can be manageable, consumers must weigh the advantages and drawbacks of borrowing money at a certain interest rate. Federal student loans offer low interest rates on money that can be used to finance higher education and increase a student's earning potential after graduating. But students should carefully consider other aspects of borrowing money for higher education such as living expenses and choice of school.
A student contemplating a federal or private student loan should project how much the total loan will cost and how much he or she could potentially afford to pay post-graduation. By looking at the loan amount as both a lump sum and broken down by payments, a student can determine how many years they will have to work to repay the loan. This may influence the student's education or cost of living decisions.
Similarly, buying a car or purchasing a home should also be viewed in terms of long-term value and cost of repayment. Borrowing money to buy a house or car can be an investment that may deteriorate in value as time goes on, especially if the interest rate is subject to an increase. Consumers should avoid borrowing money at an interest rate that may increase with time while the value of the purchased asset decreases.
When compared to cars, real estate generally increases in value. Although depending on the location of the property, the market has been subject to great fluctuations in appreciation. A good rule of thumb for budgeting a car and home payment is to spend no more than 55 percent of your personal budget on housing and car costs.
Also, when purchasing a home, there are many loan fees that must be paid at the time of closing. It may take a few years to recover the cost of setting up a mortgage so it's best to think of buying a home as a long-term investment unless there is a large potential for profit.
Living with large loan payments is manageable as long as a strict, realistic budget is implemented to prevent any missed loan payments. By determining your budget in advance, you will be able to make an educated decision before you borrow money. Budget first, borrow second. This will guarantee that you do not over-borrow and put yourself in financial turmoil.
Living debt–free is possible as long as you borrow wisely for items that will increase in value over time. And borrowing wisely means investigating all costs and potential pitfalls of a specific loan so you can live within your means.
Additionally, many people declare bankruptcy because they are unable to pay hospital bills. Remember that your budget must make room to cover not only your loan payments, but unexpected situations that may cause you to overspend such as car repairs and dental visits.
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