It may fall outside the realm of ObamaCare, but it is a good idea to give your collective debt an end of the year checkup. Consider which debt is healthy and which debt may be showing symptoms of chronic conditions that will attack your bank account and put you in poor financial health.
For this examination, you get to be the doctor! Don't worry – we are here to help as your trusted assistants. Remember two things: debts without significant return and high-interest-rate debts are usually bad.
Just as a doctor would examine different systems in your body individually and then see how they work as a whole, we will do the same with individual debts and then consider your cumulative debt.
- Mortgage Debt – Mortgage debt is usually the best form of debt, as you are building up equity in your home and gaining an appreciating asset. However, if mortgage debt pushes your cumulative debt too high, it can be considered bad debt. Just as with your body, healthy things can become unhealthy if pushed beyond moderation.
- Educational Debt – Again, educational debt is considered an investment because it should help you get a higher-paying job – but it is not guaranteed. It is very hard to get a student loan discharged or forgiven, so if you don’t get a job proportionate to the expense, student loans can be a very bad debt.
Nobody wants to think about that aspect as he or she enters college, but the return is important. You might be able to get scholarships or go to a different college that should produce a similar return for less cost if this is a concern for you.
- Installment Debt – Installment debt for big-ticket items such as automobiles, appliances, and entertainment devices may be good or bad depending on the need of the item, the interest rate, and the installment terms. Typically, interest on this type of debt is high, so you should pay installment debts off early if you can.
As to whether it is good or bad debt – you generally know, even if you won't admit it to yourself. Did you need to buy a Porsche vs. a Prius? Did you need a 75" flat screen TV with Surround Sound vs. a smaller, simpler model? Do you even need a TV at all? Only you can balance the value to you compared to the debt you incur.
- Credit Card Debt –