Let’s talk about debt baby. Let’s talk about you and me. Let’s talk about all the good things and the bad things that may be. Let’s talk about debt.
Do I have you humming the tune to a popular Salt-N-Pepa song circa 1990?SEE MORE Debt After Death: What You Should Know
I have to bring some joy during the pandemic! OK. We talked about the importance of budgeting and cash flow analysis. Now, let’s focus on a related topic: debt.
True or false? Some debt can be good. Answer: True. But there’s a catch. You should be responsible with debt and use it to acquire an appreciating asset; in other words, an asset that will increase in value over time. This takes discipline and focus.Good Debt: Mortgages and Student Loans
Most people can’t afford to purchase a home outright, or entirely with cash. They rely on a mortgage to finance the home purchase. If you are a first-time homebuyer, I’d strongly urge you to save at least 20% of the home’s purchase price for a down payment. Otherwise, you may have to take out a secondary loan at a higher interest rate or pay private mortgage insurance, also known as PMI. What if the value of the value of your home declines after the initial purchase, as happened to me in 2005 near the peak of the real estate market? I wasn’t a financial adviser then and had only saved 10% for the down payment. My first home was a big financial mistake — at least a $15,000 loss on a $150,000 starter home when you factor in closing costs, realtor commissions and renovations. Yet, I learned valuable lessons.
Mortgage debt can be good. In fact, my husband and I recently had the option of taking our Missouri home sale proceeds and providing even more than a 20% down payment on our new home in Florida. However, with the mortgage rates so compelling, we kept the extra cash and invested it in other long-term goals. You can exercise the same judgment when purchasing a new home.
The other “good debt” could be student loans. In many cases, bachelor’s degrees are required to get into any white-collar position. Some professions demand additional schooling. A newly minted doctor or lawyer could easily have over $200,000 in student loan debt.
Is your child entering college soon? If so, have a candid