Now you’ve got an emergency fund sorted, or at least you know what one is, lets go to step two.
Step two: Take a look at your debt and determine what debt is ‘good’ and what is ‘bad’.
Debt is like an anchor.
Quick facts – U.S total consumer debt is over $4 trillion and The average American has over $6000 of credit card debt. Pay off and keep your debt at zero, where possible. If you are not in control of your debt, you are not in control of your financial future. If you are not in control of your boat anchor, you are not in control of your boats movements.
Start with your smallest debt to build confidence and momentum and keep that going as you knock out more debt. I used to have NZD$18,000 in debt from University which I paid off as soon as I could. I know now that every dollar I earn is mine.
There is a case for good debt and there is no one size fits all answer to good debt vs bad debt. I would argue that good debt would be a house deposit and bad debt would be a car loan, phone loan or similar.
Now there is an argument for keeping your debt if your investment returns are higher than you debt interest.
Example; your investments return 6% per year and your debt interest is 3% per year. Well, in some cases, it might be worth keeping your money in investments, or continuing to add to them, rather than paying down your debt because in the long run you’re making more with that money. I hope that makes sense.
Thankfully, I’ve never had lasting/serious debt and I hope to never have to!
