Good Debt Versus Bad Debt

How many of us have been to our physician and received an explanation about good cholesterol and bad cholesterol? Much has been written about it, as well. But, how many have heard explanations about good debt versus bad debt? Probably very few, as financial education is sorely lacking in society.

Personal debt is on the rise, partly because obtaining credit today is relatively easy. If you breathe, you can probably obtain a credit card from your bank or a retail store. And, more often than not, the only one who benefits is the one who issues the card and charges interest rates that can exceed 20 percent.

Far too many consumers confuse credit cards and cash. If you are prepared to pay off your monthly balance and merely use the card for convenience, you're in the responsible minority. However, far too many people freely use their credit cards and neglect the fact that the bill eventually has to be paid. Paying only a minimum at the end of the month only digs a deeper hole. And, truthfully, most people don't keep track of how much they spend on their cards.

On the other hand, not all debt is bad. Taking a mortgage to purchase a home is a wise investment. As the house appreciates, the value will exceed what you paid on the loan. Another example of good debt is securing a loan to purchase high return stocks or bonds. When the return exceeds the interest paid, your debt has accrued value.

Experts suggest that your debt-to-income ratio should not exceed 20 per cent. Higher than that looks bad on credit reports and can lead to difficulties. Better to keep debt to a manageable level and avoid the temptations of living on credit. Even when times are good, don't forget to prepare for the eventual rainy day as well.

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Paying Down Debt vs. Savings

The great Canadian conundrum – live for today or tomorrow? In an era when money is tight and many families have to make tough financial decisions, the question of priorities arises. How much should one save for the future? How should one juggle his current needs with future needs?

Certainly, young couples face this dilemma. By trying to squirrel away retirement money and manage a young household, many couples begin to choke. Experts advise that the best strategy is to erase debts before saving money. Start by paying down credit card bills. The result is a guaranteed after-tax return of 18%. No RRSP will offer that rate of return! Try, as well, to whittle down the mortgage. Once these debts are out of the way, you can re-direct the money into your RRSP.

In addition to the debt-first strategy, the next step, once you're ready to invest, is to prepare yourself for the inevitable. Since you can't predict the future, try to be in control of your options as best as possible.

Plan your investments with some foresight. Rather than look for the best deal today, try and decide what your future needs will be and work backwards. Invest in ways that will best fit your needs. Try to find the best mix of stocks and bonds for you and stick to that mix. Markets shift but your long term consistency should work to your benefit. Also, try and limit your risk. Some is necessary but everything in moderation. Consider a 60-40 mix of stocks and bonds. Once a year, take some money from the more profitable side and bolster the lagging side. This way, you will always buy low and sell high.

Remember the sage advice – be in control of your money; don't let your money control you!

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Truths About Bankruptcy

For some individuals, there is no alternative. Financial debt can eventually lead to personal bankruptcy. Although the prospect of absolving one's self of debt by this method is a frightening thought, the truth is that there are many misconceptions surrounding the bankruptcy process that serve to make a difficult situation even worse.
 

Many people believe the misconception that filing for bankruptcy requires hiring an expensive lawyer. Truth be told, Canadian law states that lawyers cannot serve as bankruptcy trustees. In fact, small bankruptcies are filed by a trustee and do not appear before a judge. Moreover, if you're worried about protecting your privacy during this difficult time, fear not. Since 1997, personal bankruptcies are no longer advertised in the newspaper so your privacy in this delicate matter is assured.
 

Some have an image of the bankrupt individual sitting penniless in the street, hat in hand. That's a fine cartoon image but not reality. Declaring bankruptcy requires committing to a modest lifestyle for at least nine months. Different provinces have different rules regarding the amount of money you may retain as well as which possessions are protected.
 

A common untruth is that all debts are erased upon declaring bankruptcy. In fact, some debts are not. Child support and alimony are not changed. In many cases, student loans are also not erased.
 

Fearful that you will remain bankrupt for life? Fear not. Once your obligations have been fulfilled, you can be discharged from your bankruptcy. In a majority of cases, this occurs after nine months (but it can be extended if there is reasonable opposition from interested parties). Also, believe it or not, many people can re-establish their credit within one to two years after declaring bankruptcy.
 

No two cases are the same. But, before making a decision about declaring bankruptcy, do not merely visit the local rumour mill. Do the appropriate research carefully.

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