Wednesday, April 27, 2016

Be Smart About Debt

Shortly after I graduated from college, I worked in the office of an oilfield equipment manufacturing company. One of the guys from the plant liked to give me unsolicited financial advice. "I never worry about how much something costs in total," he counseled. "The question to ask is, 'How much a month, for how long?' That's all the information you need to know when you're deciding whether you can afford a purchase. Think of it as just another bill."

I'd nod politely, but even though I was young and naïve, I found it hard to digest that philosophy. Why wouldn't knowing the total cost of an item matter?

If you don't care about ever getting out of debt, make only the minimum payment each month. You'll pay for your purchases many times over. Think about what you could do with all that extra money...

For most people, debt is inevitable, and many would argue that there is such a thing as "good debt": a mortgage on a family home, a student loan to finance a college education, perhaps even a car loan or credit card debt for suitable clothes so you can nail that job interview and eventually earn a living.

But too much debt is suffocating, and it can prevent you from building wealth. Interest and fees can accumulate to the point where your costs to finance a purchase exceed the value of that item.

Before you take on debt, know why you are doing it. How much are you borrowing, and how long will it take to repay? How much are you paying in interest?

Can the purchase be postponed for a while, until you can come up with the cash, or at least a larger down payment? What are the advantages of buying now, or financing instead of paying in full? Will there be a return on your investment, i.e., the extra cost to your purchase price that you will add in interest?

Look at debt as a means to an end, and let there be an end in sight. Don't regard debt as a perpetual bill.

What are your thoughts on debt? I would love to hear your comments.

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