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Paying off high interest debt with savings, Still a good idea?

September 5th, 2009 Joe No comments

This morning I am reading a few different blogs and I found Five Cent Nickel.  A recent article posted brings up a good question.

If I have money in the bank and high interest (10%+) debt should I use my savings to pay it off?

The short answer, YES pay it off.

The question gets complicated from person to person.  In this economy people are keeping more cash in the bank incase they get fired, or generally need it.  This advice has bee pushed by Suze Orman and many other financial advisors.  I am in agreement with them.  Everyone should have some money in the bank.  Personally I would be willing to take a little more risk if I were carrying high interest credit card debt.   I would push everything to the credit card until I was down to exactly 4-5 months emergency fund.  For some the extra 2-5 thousand dollars paid on the credit card might pay it off.  There is no reason to carry debt if you can pay it off and still leave yourself a good emergency fund.

If you thing you are going to get laid off or feel your company is doing poorly in this economy keep saving your cash.

Check out the Five Cent Nickel original post here

http://www.fivecentnickel.com/2009/09/04/debt-reduction-penny-wise-and-pound-foolish/

Debt

July 28th, 2009 Joe No comments

Today all the big news mills are talking about DEBT. Everyone in America including America is in DEBT. Everyone talks about DEBT like its this huge terrible monster. The fact is there are two kinds of debt. One kind is what most people today are battling and the other kind is not really a big deal. For simplicity I will refer to these two kinds of debt as good and bad debt.
Starting with bad debt because I like to get the bad news out of the way. Many people today have been affected by greedy politicians and government policies. If you have been affected in the recent economic down turn (most of us have) your bad debt may have spiked. This is not 100% your fault, however its not all “their” fault either. A poor financial education leads to being “affected” by greedy people. The greedy people are not going anywhere so the only thing you can do is get a financial education. Bad debt is any debt that does not make you money. Bad debt is your personal credit card balances, bad debt is a car loan, bad debt is a personal mortgage. Anything you have to pay for that does not pay you back or make you money.

Lets get on to good debt because thats more fun. Good debt is a mortgage on an investment or income property. Good debt is a note with a supplier for business inventory. Good debt makes you money and bad debt takes your money. Thats the simple way to know the difference. Many people have experienced bad debt. Many people have not experienced good debt. It is funny that 90% of the people experience bad debt and 90% of the people hold only 10% of the wealth in America. The top 10% of the wealth holding people I guarantee you have experience with good debt. Good debt is the fastest way to become a millionaire (aside from lottery, jackpots, death, marriage, and other unreliable sources) Sometimes you will hear the term leverage. This is because you are taking a small amount of your own money and using it as leverage to get good debt and therefore make money. I recently was looking into buying an income property for $300,000. I went to the bank to see if I could leverage my money and therefore not have to tie as much up. The bank told me I could borrow $270,000 to buy this income property. I was pretty surprised since we are in the middle of a credit crisis. I only needed to come up with $30,000 to buy a $300,000 income property. The property was a four plex. The total monthly income from the property was $3000 a month. My payment for the mortgage was going to be around $1400. That means I would gross $1600 a month. I thought that was pretty good for only investing $30,000 of my own money. I know thats only a 5.33% return on my investment PER MONTH! Thats a 64% return on my investment per year. I think thats a pretty great investment at any level. We are still only talking about $1600 per month but it was a great real world way to show you what GOOD DEBT is. Good Debt makes you money Bad Debt takes your money.

Like I was saying earlier many people currently have bad debt. It is time to stop collecting bad debt this only keeps you from your millionaire goal. Even us millionaires have to keep bad debt in check. Bad debt is real simple to get. Getting out of debt can be hard. You have to just make it happen. A way to make it happen is to start collecting assets. An asset is something that gives you money, like a business, income property, or investment. I prefer my assets to give me money monthly. All assets are different some pay monthly, quarterly, yearly, every 5 years, and many other crazy combinations. To get out of bad debt it is best to acquire assets that pay as often as possible because you need to pay those bad debts to stop them from growing.
Continue thinking about getting out of bad debt. Consider all your debt, do you have good or bad debt?

Next post acquiring assets, where to find them? What does a good asset look like?