Debt became a way of life for most families only in the last few decades. Other generations chose to pay for everything in cash. The introduction of the 30 year mortgage drove home prices out of the reach of most cash purchases and the debt stone began to roll. Soon everything from groceries to second homes was being purchased with debt.
The basic definition of debt is using money that you have no ability to pay back at that moment. A person that borrows money to buy a home does not have the money to make that purchase with cash. The money gets repaid a little at a time in the form of monthly payments. The lender makes money from the process by charging interest for the use of its money. Everyone is happy. The buyer gets what the buyer wants when the buyer wants it. The lender makes money.
The last several years has taught everyone that debt may not be a problem, but too much debt can hurt everyone. The buyer loses what the buyer bought, the lender loses money because the lender gets stuck with the item, and the economy suffers because the system gets caught in a loop.
Debt and credit can be beneficial to the system. The key must be responsible borrowing and responsible lending. Experts say that a person or family should spend 50% of the income on necessities (including the cost of a home and car) then 25% on savings and investments and 25% on wants. Lenders should keep borrowers to these limits and borrowers should choose to never take on more debt than 50% of the income can pay.
Getting a family budget back to these figures may not be easy, but it is always possible. It may require doing without “necessities” – like television, extra cars or the latest trends – but it can be accomplished. Additional jobs may be needed to make extra payments on the debts that exist in order to get the finances back under control. Once things are back in balance, the individual and family must evaluate future purchases with the 50/25/25 model.
Debt does not have to be a dirty word, but it must be used with moderation. Too much of anything can cause an issue (just ask someone that has eaten too many carrots). Learning how to use debt wisely and how to pay it back in an aggressive manner allows buyers to increase their buying power without letting finances dictate their lives.
Understanding debt can be the easiest way to make it work for you and not against you. Make it a tool for getting what you want but allow patience and wisdom have the final say in each decision.
Written by Peter “Van The VA Man” Brady is A Veteran’s Administration Home Loan specialist and has helped hundreds of Southern California veterans get VA Purchase and VA Refinance Loans.
This reminds me of that commercial where the guy is mowing the law and with a big smiile says “I am up to my eyeballs in debt” great guest post.
I know that ad…..it makes me laugh and cry at the same time.
Never seen that one – is it an advert for debt or lawn mowers? lol
It sometimes seems like banks and credit unions make debt difficult to understand in order to make more money. Perhaps that’s true, but whatever the case, you’ll be able to pay your debt down faster if you know where the money is going and work out a debt management plan to take charge of your finances.
So true…Most people have debt it’s just the extent that varies. Debt in moderation is okay but that’s hard to control after a certain point.
Yes it is hard to control once it gets to a certain point. I had about $20K in debt and I felt like I was losing my mind…but if you just make a plan and keep plugging away at it then it becomes easier to manage once you start to get over the small hurdles.
I read Dave Ramsey’s Total Money Makeover last year. To date I have paid off $12000 in credit cards, bank loans and a few medical bills I had lingering around. I am 7 months away from only having my mortgage to pay. The feeling is good, and my “saving” mentality has taken a 180′ turn for the better. I recommend this book and I am contemplating attending his Financial Peace University in a month or two.