This post is all about understanding the difference between having good or bad debt.

Debt is something many people have to deal with, but it can be helpful or harmful depending on how it’s used. Good debt can be an investment in your future, while bad debt can hurt your financial future. 

Good debt can help you grow your wealth, like buying a home or going to college. Bad debt, on the other hand, is usually associated with short-term purchases or unnecessary expenses that come with high interest rates. 

It’s important to think carefully before taking on debt and make sure it aligns with your financial goals.

Remember, not all debt is created equal!

Debt can be a tricky thing to navigate. While some low-interest debt can be beneficial, too much of any kind of debt can quickly turn into a burden.

Medical debt, for example, is an expense that doesn’t necessarily fall into the “good” or “bad” category. It’s often unpredictable and doesn’t have an interest rate. 

🎓 When it comes to student loans, it’s generally regarded as an investment in your future. Federal student loans tend to have lower interest rates, making them a smart choice. But it’s important to aim for a student loan payment that stays below 10% of your projected after-tax monthly income a year after graduating.

🏠 Buying a home is likely one of the biggest decisions you’ll make in your lifetime. Mortgages are a popular way to make that happen, but it’s crucial to know how much house you can realistically afford. Keep your mortgage payment to 36% of your income, and consider downsizing or moving to a lower-cost area if necessary.

🚗 For many people, owning a car is a necessity. But car loans can quickly add up, so it’s important to keep total auto costs, including your car loan payment, within 20% of your take-home pay. Loan terms should also be four years or fewer, preferably with a 20% down payment.

If you’re finding yourself overwhelmed by debt, don’t panic. There are options like refinancing and income-driven repayment plans that can help you get back on track. By being mindful of your debt and taking action when necessary, you can set yourself up for financial success.

Bad debt is any debt that is expensive and can hurt your financial situation. Things like high-interest rates or purchasing things that lose value can be examples of bad debt. But sometimes, bad debts start as good debts and can spiral out of control. Credit card debt is a prime example of this. 

💳 If you’re struggling with high-interest credit card debt, there are some things you can do. One option is the debt snowball method, where you pay off your smallest debts first. This can help you stay motivated and make progress on your debt. 

🛍️ Taking on personal loans for things like vacations or new clothes can also be a slippery slope. While personal loans can be a good option if you have a specific goal in mind, like consolidating debt, taking on debt for discretionary purchases can be expensive. If you’re facing an expensive personal loan, you may be able to refinance it to make it more manageable.

Identify your debts:

Make a list of all the debts you owe, including the interest rates and minimum payments. Grab a pen and paper and write down all the debts you owe, from credit cards to personal loans.

Make a budget:

Figure out how much money you have coming in and going out each month. Look for areas where you can cut back on spending to free up extra cash for debt payments.  See if there are any subscriptions or unnecessary purchases you can cancel to save money. Check out my Finesse Formula budget template.

Choose a debt payoff method:

There are several popular methods for paying off debt, including the snowball method (paying off the smallest debts first) and the avalanche method (paying off the debts with the highest interest rates first). Choose the method that works best for you. Some people prefer to start with the smallest debt to build momentum, while others focus on the highest interest rate to save money in the long run.

Increase your payments:

Try to pay more than the minimum payment on your debts each month. Even an extra $10 or $20 can make a big difference over time. Even an extra $20 a month can help you pay off your debt faster and save money on interest.

Remember, paying off debt takes time and effort, but it’s worth it in the end. Keep track of your progress and celebrate your milestones along the way!

📰 In the news:

Why it matters

Mortgage rates have declined for the fifth consecutive week, easing homebuyers’ borrowing costs just in time for the spring buying season. However, the lack of inventory on the market remains a significant housing challenge. Low supply continues to keep home prices elevated, and sellers aren’t motivated to list their properties, as more than 85% of homeowners with mortgages have locked-in rates below 5% and wouldn’t be able to buy a new home with the same or lower rate elsewhere.

By the numbers

The average rate on the 30-year fixed mortgage had a minor dip to 6.27% from 6.28% the week before, according to Freddie Mac. Rates have been sliding since early March, declining nearly half a point since March 2nd. Market inventory increased 15.3% on a year-to-year basis to 980,000 units towards the end of February, and increased from 850,000 units compared to prior year. However, this level of activity is still at a ‘historical low’. There’s currently a 2.6-month supply of homes; a robust market has around a 6-month supply.

The big picture

The drop in rates and cooling inflation help potential homebuyers, but the lack of inventory continues to be the most significant housing challenge.

Since fewer homeowners are putting their houses on the market, there aren’t as many options for buyers. And let’s be real, both buyers and sellers are feelin’ pretty bummed about the real estate market, especially when it comes to mortgage rates. So, we can expect the number of homes sold to stay lower than last year for a few more months.

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