Basic steps to reducing debt

Good-Bad-DebtBelow is a short article on 3 steps to get you started on reducing debt.

By the way, most think that there are two kinds of debt. I separate a good debt into two and make a distinction, so here are 3 kinds of debt:

1) Good Debt: This article at CNNMoney Money 101 lumps what I call Good and Necessary debt together. I make the distinction that a mortgage on a home is the only example of good debt (assuming the home value may appreciate over time, thus offsetting ownership expenses).

2) Necessary Debt: In this Money 101 article, their examples of Car and College are what I call necessary debt … it is necessary to have transportation to get to your job (which is where the money comes from for everything else!), and education (which is a method to improve your skills and thus get more money for everything else!).

I put these in the necessary group to avoid the thought that it doesn’t matter what kind of debt you have! It does! Too much transportation and you are over paying to have that expensive transportation (car) parked either at home or at work most of the time (in other words it has become bad debt). Too much education and your job may not be able to pay off the education debt. In other words, either or both of these debts may crowd out other living expenses if taken to an extreme relative to your earnings power. Necessary debt could easily become bad debt if you go over board. I think you understand the fine line of distinction.

3) Bad Debt: Paying today for yesterday’s (or even older) consumption. You have nothing to show for it other than bills! These are credit cards of any kind and may include other sources of loans … but the common denominator is for something you paid for and got little gain from. Nothing wrong with that … but those expenses should be paid out of current money you have without piling up debt, which you have to pay for anyway out of current money you make eventually!

Your priority for debt reduction is from the bottom up: first bad debt, then maybe necessary debt (especially if you went overboard on spending for transportation or education), and finally possibly the mortgage (but only if you are saving up enough liquid resources to pay for retirement expenses).

Prior blog on “In what should the young invest?”

Want to get a better handle on your budget? All Your Worth: The Ultimate Lifetime Money Plan. It is much easier to manage your money when you have a broader perspective on how to relate to your money.

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2 Responses to Basic steps to reducing debt

  1. Larry Frank, Sr. August 18, 2016 at 7:22 am #

    Why It’s A Bad Idea To Borrow Based On What The Lender Will Allow by Kitces
    https://www.kitces.com/blog/debt-to-income-dti-lending-guidelines-are-bad-affordability-targets/

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