Debt has become an increasingly ugly word for many people in recent years, particularly in the wake of the financial collapses of late 2008 and early 2009. While it is good that people are more aware of the dangers of debt, it does not necessarily follow that debt is always an unnecessary evil to be avoided at all costs. Provided that credit is obtained only when required and the resulting debt is managed effectively, sensible levels of debt can help improve both quality of life and financial stability.
Purpose of debt element
When you are thinking about entering in to a credit agreement or taking out any other element of debt, you should carefully consider your reasons. If your car is virtually scrap material and you need it to get to work, fetch the groceries and conduct other important elements of your day to day life, it will be likely that taking out a reasonable loan to replace it would be a sensible option. If, however, you are considering taking a loan for an expensive, overseas vacation when your washing machine is dysfunctional, your sofa is falling apart and you have a leaky roof in your bedroom, this is probably not a sensible action.
Affordability of debt
Debt problems frequently arise when insufficient thought has been given to the affordability of credit over the longer term as well as the short. Regardless of the purpose of debt, it is vital to consider in advance the impact it will have through the course of the scheduled repayment period. It may be that debt repayments seem affordable while extra hours are available at work in the short term but may not prove so attractive on a basic wage. It could be that a significant expense is known to be just around the corner which will similarly impact on your overall personal finances. Short term gain of this type can cause long term pain.
View debts cumulatively
Credit agreements do not all necessarily represent monthly repayments of a couple of hundred dollars or more as would be the case when buying even a modest car. Very often, people encounter debt problems because they have accumulated a series of smaller debts, with individual repayments representing only ten or twenty dollars a month. Whenever you are considering taking on a new element of debt, consider the new cumulative monthly repayment totals in relation to your income. Don’t make the mistake of thinking that it’s only a few extra bucks a month and won’t make that much difference.
Recognize debt problems early
It is important to track and evaluate your personal finances on a regular basis. Consider how income changes affect debt repayment and – on the other side of the coin – consider how rising repayments on non-fixed rate credit agreements relate to your income. If you see a problem starting to materialize, act immediately to reduce your debt levels, seeking independent professional advice if appropriate.
Debt in itself is nothing to be feared but the problems it can cause are very real and should always be at the back of your mind. By being sensible about debt and reining in your spending as and when appropriate, it is entirely possible to manage reasonable levels of debt on an ongoing basis and know the lifestyle boosts it can help provide.