When many people think about financial planning, they focus on building assets like bank and retirement accounts or buying a home. But your financial plan also includes debt, and how you manage this can do much to either improve or hamper your finances. Here's what you need to know about debt and your financial plan.
Should You Avoid All Debt?
Some people accept all forms of debt as a part of life while others avoid it at all costs. But, in fact, debts fall into different categories and should be treated individually. Bad debt has high interest rates, making it expensive, and can trap you in a cycle of repeated debt.
Good debt, though, is inexpensive and contributes to improving your overall situation. For instance, a mortgage may have low rates and pays for an appreciating asset. These can be a net positive in your finances.
Should You Just Accept Debt?
Just because some debt is better than other debt, though, doesn't mean you should just ignore it all. A good financial plan uses the strengths of credit while minimizing its weaknesses.
This usually begins by reducing or eliminating bad debt. This step can be the hardest for many Americans, especially those who are new to taking control of their finances. There are several methods to get rid of bad debt, including so-called debt snowballs and even debt tsunamis. These methods help you stay focused on eliminating the right debts in the best order.
Can You Use Debt Wisely?
So, how can you use debt wisely in the future? First, recognize that debt will sometimes happen and plan for it. If you want to buy a home in the next few years, you might spend this time improving your credit score and shopping for the best rate on mortgages. You may then balance a larger down payment with monthly payments to ensure your debt doesn't become burdensome.
Second, minimize the need to use bad debt. How might you and your financial planner do this? Shore up your liquid cash. Make sure you have appropriate insurance to cover emergencies and health care. Put in place good debt options, such as lines of credit, that can be deployed if the need arises. And make goals within your financial plan to cover large future purchases (like replacing vehicles or taking a big trip).
Where Can You Learn More?
Want to get started? Begin by consulting with an experienced financial planner who will help you assess your current use of debt. Together, you can craft a financial plan that minimizes bad debt and makes the best use of good debt. Call today for an appointment.Share