What You Need to Know About Debt
If you are like most Americans, you probably get a new credit card offer in the mail on a weekly basis. Nearly every time you shop in a retail store or online, you are given an opportunity to open a store specific credit card with another line of credit. Resisting the urge to spend money you don’t have is difficult in a world where “free money” seems so easy to obtain.
As a society, do we really understand debt? I recently sat down with a bankruptcy expert, Justin Burton from Rulon T. Burton & Associates. Since I had a few minutes to ask this expert any question I could formulate, I proceeded with the following question:
“What do you wish every American knew about debt?”
Justin’s answer is quite insightful. He answered that he wished every American understood when going into debt is acceptable and when going into debt is simply unacceptable. Naturally I was curious about his definition of “acceptable,” so I asked him to elaborate. Here is what I learned:
ACCEPTABLE SCENARIOS TO GO INTO DEBT
1. For a modest home.
2. For ONE modest vehicle per household.
3. For an appropriate amount of student debt required to obtain a good degree from an accredited program at a reputable college or university.
Are you surprised by the length of this list? Did you notice this list does not include items or services commonly purchased with a credit card?
I think it’s important to define debt before we proceed any further in examining this advice. Debt is something that is owed. If you can buy something now and pay for it now, that is not debt. If you can buy something now, or receive a service now, and pay off any balance in the future, that IS debt. Simple enough?
We should also take a look at the definition of modest. What makes a home or vehicle modest? An alternate word for modest is adequate. Is your home adequate for your family? Is your vehicle adequate for your family? Adequate should never be associated with excessive. For example, going into debt for a 7 bedroom home for a family with two children fails the adequate test. Going into debt for a luxury vehicle of any type also fails the adequate test.
The second thing this veteran bankruptcy attorney wished every American knew about debt is that you should never pursue debt that requires two full-time incomes to manage. Even if you and your spouse currently both have full-time jobs, you should pursue debt based upon ONE income.
You may have read the previous counsel to not go into debt based on two incomes incorrectly. If the second income enables you to purchase something now (without running you dry), then you can choose to proceed. If based upon two incomes, you cannot afford the good or service now, but you can afford the monthly payment required, walk away. Yes, you read that correctly, walk away from the monthly payment you think you can afford with two incomes.
Don’t forget the rules of when it’s acceptable to go into debt. Mortgage payments toward a modest home, car loan payments for a modest vehicle, and appropriate student loan payments should reflect a single income, not both.
Remember the modest approach. Any home or vehicle that requires more than one income to make the monthly payment is not modest! If you find yourself thinking, what good is making all of this extra money if we can’t live more lavishly? Consider saving the “extra money” you are making instead. Over time, this will allow you to make more lavish purchases WITHOUT going into debt. A second income should be used to increase your financial security, not increase your debt.
The next time you are tempted to purchase something that will require a payment plan, ask yourself the following questions:
1. Is it for an acceptable purpose? (as outline above)
2. Can we afford the monthly payment with ONE income?
3. Does this purchase pass the adequate test?
If you answered any question with a no, do not proceed with your purchase. If, however, you answered all three questions with a solid yes, then the debt required is deemed acceptable.
Guest Author: Whitney Hollingshead
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