Good Debt vs. Bad Debt

Is there such a thing as “good” debt? My grandparents didn’t think so. They grew up during the Great Depression and they never took out loans for anything their entire lives. They paid cash for every vehicle they ever bought. They built their house in stages, living in their basement for a time so they wouldn’t have to take out a mortgage. I have to respectfully disagree with my grandparents, I don’t know that any debt is really great, but I think some is both necessary and not all that bad.

The first kind of debt that I recommend is a mortgage. The vast majority of us have to pay someone for our housing, whether we pay rent or a mortgage. And if you pay a mortgage you’re building up equity (albeit at a slower rate than it was once possible to do.) You can also use part of your mortgage interest payments as a deduction on your taxes. So overall, I’d call a mortgage good debt.

Car loans are a little harder to justify, but I live in Denver which isn’t known for stellar mass transit options, and my husband and I both have to get to work. So we have auto loans for our cars that is maybe not “good” debt, but it is pretty much necessary debt.

My husband went back to school a few years ago to get his Master’s Degree and we took out a student loan to pay for his schooling. I also think this is good debt because it allowed my husband to get a raise (he’s a teacher and he automatically gets more money for higher education), and the required payments are so low that it’s easy to pay additional principle on the loan.

So I guess I’d call debt "good" if it’s necessary, has a reasonable interest rate, and/or helps you to improve your life in some way. Bad debt is pretty much everything else, especially those nasty credit cards that definitely do not have a reasonable interest rate!

The Secrets of Successful Money Mangement

There are really only two things that you need to know to successfully manage your money:

1. Know how much money you earn and how many bills you have to pay (a.k.a. "budgeting"). Most of us have heard the old adage that you shouldn’t live beyond your means, spending more money that you earn. Easy to say, not always so easy to do. Knowledge and planning are what allow you to heed this oft-given advice.

2. Delayed gratification. If your water heater goes out, it's probably a good idea to accept some debt so you can get it repaired and not go to work with hypothermia or unkempt. But if your old television set works perfectly fine but you really, really want that large-screen LCD crystal flat-panel set, you should probably wait until you’ve saved up enough money to buy it rather than purchase it on credit.

If you can make a realistic budget and stick to it by controlling your spending and saving up for new purchases, vacations, etc. in advance, you'll be well on your way to successfully managing your money.

Doing my part to contribute to a global economic recession

The idea of this blog is to share some of my knowledge to help people who have questions about how to manage their money to live within their means. After reading this article I wondered if this is really a good thing to do!

My Inaugural Post

This being my first post, I thought it appropriate to explain a bit about my background and what qualifies me to give money management advice. -- When I was a little girl my parents gave me a weekly allowance, and I would immediately pull out my ledger book. (This was back in the days before the fancy ATM piggy banks!) I had 3 categories that I placed my allowance into: 1/2 of the money went into long-term savings (for that oh-so-distant idea of college), 1/4 of the money was placed in short-term savings (for the more expensive toys), and the remaining 1/4 was mine to spend at the toy store or 7-11 whenever I wanted. I didn't manage to put myself all the way through college with 1/2 of the allowance I received as a child, but I always had plenty of money for anything that I wanted (unlike my brother!)

My method is more sophisticated these days, but I still use the same basic principles and I still always have enough money for everything that I need. I have also managed to remain free of credit card debt for the majority of my adult life, and start saving for retirement and college funds for my kids. I still place my money in 3 categories to be able to better manage how I spend it. The 1st category is investments like 401k, Roth IRA, savings account, etc. The 2nd category is allocated money which is how I save for Christmas, home repairs, license plates and the like. The 3rd category is my regular checking account that contains my spending money, although I spend it on vastly different things than I used to!

I have plenty to write about in this blog, but I'm well aware that I can't think of everything so I'd love to get your questions. I am not a financial planner or advisor, and I won’t pretend that I can give you advice on what stocks or bonds to invest in to get rich. If you send me a question that I can't answer, I'll be honest, but if you have questions about things like how to budget or how to make sure you have enough money leftover before every paycheck, I can probably give you an answer that could help you out. So email me those questions at themoneymaiden@yahoo.com.