Debt, in and of itself, is not necessarily a bad thing. In fact, over 80% of Americans are “in debt”. More astute readers, of course, will point out that surely a lot of this debt is good debt, providing access to assets like education or houses. Even some more questionable debt such as credit card (revolving) or auto loans can be viewed as a good decision if the rates are low and the assets are being put to good use. Where does this debt cross the line? I don’t have a hard rule, unfortunately, but it is around the time when debt can be thought of as both a problem and a symptom of an underlying problem: spending more than you earn.
Net Income = Income – Spending
The only strategy for building wealth is to spend less than you earn. If you gather assets that increase in values, it increases your income. If you gather debts that increase in value, it increases your spending. All the hand-wringing and financial chicanery in the world cannot defeat this simple equation. If spending continuously exceeds income for a long-amount of time (while working, especially), it is a sign of underlying problems in spending or income. Earn more money, obviously!
Low-interest credit cards such as 0% teaser rates or balance transfer options can be a great way to manage your debt without increasing expenses too much. Again, though, the distinction here is important! If BTs and teaser rates are just being used to mitigate an underlying spending problem, it is only kicking the can further down the road. Taking a careful look at your spending and earning habits is the fastest way to get out of debt. Earning habits include how you use your sparetime (you can spend a lot of your time learning at great resources like DQYDJ.com), educational opportunities or volunteering for extra work/shifts.
Reverse Mortgages, Credit Cards and Payday Loans
Reverse mortgages often get the worst rap in financial press. Payday loans and high-interest credit cards are similarly derided. A major problem with criticizing the financial products, however, is that the consumers finding themselves wanting these products are often in such dire straits that the onerous loans are sincerely the best option. Best advice about a reverse mortgage? Don’t get yourself in a situation where you need a reverse mortgage.
How to Help Others
I wrote this article because of the bevy of information out there about how awful and evil payday lending, credit cards and reverse mortgages are. We have written before about some of the major pitfalls of these products and don’t want to rehash the same old arguments. If you or somebody you know is considering one of these products, a knee-jerk reaction against them may be correct but not particularly useful in helping the person understand their problem. Short of handing over fat stacks, a careful review of ways to either increase income or decrease spending is the fastest way to ensure that these products will not be necessary.