Debt Management
There are many formulas in existence which seek to define an acceptable ratio of debt to income. However, at times, these vary considerably, so much so that many of these have very little meaning. By way of example, some economists feel that a family may comfortably allocate 30% of their gross income to pay for their actually keeping a roof over their heads, needs. This is for mortgage payments or rental money. For the extreme poor however, this is simply not feasible. The whole problem of debt is better considered on a much more personal level.
Some debt may still be acceptable, but in today’s market conditions, this demands discernment and careful money management skills. For example, most people cannot buy a home without incurring a certain degree of debt. It is unrealistic to think that a family can perpetually live in rented accommodation until they have saved enough money of their own to go out and pay cash outright for a home of their own. It will most likely never happen. Rather, many families will think that whilst rental money for a home is a good possible short term solution, essentially this is just pouring money straight down the drain, as this money could be put to better use paying for a mortgage outright on a home of their own. Even though this can seem rather impractical at times with the realization that it can take years and years to pay the debt back, the conclusion is often, that this avenue is a lot more practical.
Over the extreme long term, generally speaking, we have come to understand that the value of our home will eventually start increasing in price, over and above the price that we initially paid for it. It follows naturally that while the debt mortgage payments may increase over the monthly rent, the family may be better off in that they are creating equity, which is the overall value of the property purchase minus the claims against it. A home mortgage at a reasonable rate, with manageable debt repayments may therefore be an acceptable level of debt. The same can be applied to other large family expenditures.
Other forms of debt though may be completely unacceptable. A good debt management plan includes the ability to reject out of hand unreasonable levels of debt. Perhaps the number one debt rule is, if you think that you cannot afford to buy something over the long term, do not purchase that debt in the first place. Money itself after all is just another product, as tangible as many of the products and services that you have become used to buying into. Avoid impulse purchasing and impulse buying. All too easy to do in the past, these days impulse buying for goods, products and services that you do not really need is simply burdening your own debt further which can over time lead to more debt stress in the future.
Avoid buying luxury goods that you do not really need. Do not take vacation trips on credit if you know that some day you will have a hard job paying off that credit. Spend now, pay later can seem still to be a good idea based on that is what we have been used to for so long, but in today’s debt climate, is it really the best way of thinking? Whatever you buy on credit, sooner or later that debt will have to be paid back somehow. Credit cards especially are very convenient in a good economic climate but in this market conditions downturn, the overall cost could really hurt you in the medium to to long term and can be if not used responsibly, be a very expensive method of borrowing money.
