GOOD DEBT VS. BAD DEBT
This month we are discussing debt with financial coach, Caroline Snyder who is the Founder & CEO of Verdi Advertising, a financial coaching company focused on helping women discover, define and create their own unique paths to financial success.
ILENE: What kinds of debt are most Americans facing?
CAROLINE: Debt can be really scary! Part of the reason it is scary is because of the logical fear of not being able to pay it off and the real consequences that come with that. Part of the fear is because we don’t talk about and don’t feel comfortable asking questions. It is my mission, and the mission of Verdi, to create safe spaces for those tough conversations!
Americans tend to have four types of debt: credit cards, car loans, student loans and mortgages. Of those four, the highest average is with mortgages. The average outstanding mortgage is currently $201,811 (according to Experian), however it is much higher in places like California because the original mortgages are much higher. In fact, the average mortgage balance in California is $347,652, almost $150,000 more than the national average.
One of the most important indicators of homeowner debt is “Mortgage Stress”, which happens when the mortgage payment is more than 28% of the homeowner’s monthly income. According to Forbes 50.07% of Los Angeles homeowners are in mortgage stress! That is a serious problem and one that we, as a society, need to address.
ILENE: Is there such a thing as good debt and bad debt? If so, can you give us examples of each?
CAROLINE: Absolutely! One common misconception is that all debt is bad all of the time. While it is ideal to live without debt because it frees up your money and your time so that you are able to live life to the fullest, it is not practical to always be debt-free. The important thing is to know what your deepest, truest goals are. Do you want to spend your time traveling the world? Making a cozy home by the beach? Starting your dream business? If you take on debt to help you reach that goal, it may be good debt!
For it to be good it has to:
Be an amount that you are reasonably able to pay off within the chosen time table (i.e. will you always be able to pay your monthly mortgage bill?)
Have a reasonable interest rate (i.e. is it competitive with interest rates for similar types of debt. Compare personal loans with personal loans, auto loans with auto loans and so on.)
Make it possible for you to get significantly closer to your goal (i.e. does the personal loan give you enough cash to pay for the start up costs related to your new home-goods business?)
One really important thing to note is that credit card is almost always bad. However, there are exceptions to that rule as well! If you are using credit card debt for a very short time period or if you have a zero-interest offer from your credit card provider, it may be okay. Just make sure that it still fits all of the criteria above AND that you are truly able to pay it off within a very short period of time (usually 1-3 months).
ILENE: Is there a certain dollar amount that I should be worried about when using credit cards?
CAROLINE: The “worry point” for credit cards is different for each person because what really matters is how easily you will be able to pay off the balance. For example, if you have a $3,000/month income, a $1,000 purchase on a credit card is really scary, but that same purchase with a $15,000/month income isn’t as scary.
Whenever you make a purchase on a credit card, you should ask yourself the following questions:
Does this purchase help me reach my goals? If the answer is no, don’t make the purchase.
Am I able to pay this off immediately? If the answer is yes, purchase away!
If I’m not able to pay this off immediately, will I be able to pay it off before I am charged interest? If the answer is yes, purchase away!
If I’m not able to pay this off immediately and I’m not able to pay it off before I am charged interest, is there a less expensive way to make this purchase? If the answer is no, then it may be good to make the purchase.
If you have any questions on how to weigh out these decisions, reach out to me at firstname.lastname@example.org and tell me Ilene sent you!
The “worry point” for credit cards is different for each person because what really matters is how easily you will be able to pay off the balance. For example, if you have a $3,000/month income, a $1,000 purchase on a credit card is really scary, but that same purchase with a $15,000/month income isn’t as scary.
ILENE: What kinds of questions should I ask or consider when taking out a line of credit?
CAROLINE: Lines of credit can be super helpful, especially for business owners. Lines of credit is an amount of money that a financial institution has agreed to lend you. You can access that cash whenever you need it, but you will have to pay interest on the amount you borrow.
When looking at credit options, you should use the same criteria described above for good debt. In addition to going through that checklist, it is really important to do your homework on the financial institutions you are looking at. Often business owners will choose to open a line of credit with the bank that they have their business checking and savings with. While that may be the best option, it may not be! It is important to shop around to find the best fit for your needs. Don’t forget to check out credit unions! A lot of credit unions offer really great opportunities for local businesses, but may not advertise as much because they often don’t have the same amount of funding as the big banks do.
Contact Caroline through her website HERE.