Avoiding debt and bankruptcy isn’t always easy, especially when necessary expenses put a hole in your pocket. But while some debt may be hard to avoid, other forms of debt can take place due to financial negligence. In this article we overview the difference between reasonable and unreasonable debt, and how you can avoid falling into the pitfalls of irresponsible financial activity…
Reasonable Debt
When we speak of reasonable debt we’re talking about items that are more on the scale of necessity vs.luxury. These are basic tools or vital things used to improve our general way of life.
1. Buying a new house
It is very rare that the average American can pay upfront money on a home, which is why loans are such a very important commodity. Of course, in 2008 we saw the abuse of such loans with the eruption that shook up our financial institution. After the gratuitous use of them, we finally realized that there should be strict laws enforced on who is able to be granted such loans. That should not suggest that if a financially responsible person is in legitimate need of them that they should be denied. Housing is a basic human need so this is a reasonable debt, so long as the home purchase is being paid off in a timely manner and is not excessive otherwise it is hard to classify it as such.
2. Purchasing a reliable vehicle
As people have to travel further distances for work, school or child care, it is a fair request to want a safe and reliable vehicle. This also falls under the category of not being excessive with the purchase to allow it to be a justifiable debt expense. Let’s be honest, who doesn’t want a jaguar or Ferrari?? If you can afford it outfight by all means that is your choice, however if you don’t want to be in debt for many years to come, be realistic on what your choices are financially in this arena then go from there.
3. Student loans
There is a lot of debate on the topic of student loans with this current political campaign. Hopefully it will create momentum for improvement this area if we want a future with well-educated people in our country, yet as it stands education is incredibly expensive. With the current state of things, if one wants to get a leg up in the financial word as the saying goes “you have to spend money to make money”. For that reason taking out loans towards a college degree is understandable. The choice of what you decide to have a degree in can make or break how much money you obtain and how long it will take to pay off these loans. So if having a specific degree appeals to you, make sure you understand the monetary implications involved and what is important to you. Determine if your career path is in demand and thriving or if it will be a difficult financial path. The choice is yours ultimately so invest in your education wisely.
4. Relocation for better work/life
Sometimes circumstances change and you need to adapt with them. Being offered a job in another state or city where your quality of life while improve in a facet that matters to you is a step in that direction. Having temporary debt knowing your relocation is for the benefit of the situation is a reasonable debt.
5. Family health care
Life is unpredictable, some things are unavoidable. The current state of our health care system has left gaps in many people’s lives, so when a situation occurs it’s important that we understand how debt can be reasonable in this case. Many times hospitals will negotiate paying off debt in increments to cushion the financial blow. Be sure to ask what they can do for you so your credit isn’t impacted negatively or you fall into bankruptcy.
Unreasonable Debt
When we speak of unreasonable debt this includes items that are essentially things we could live without vs things that help us function in our daily lives. Not knowing the difference can lead down a path of circular debt, eventually cause more stress then they are worth. Know how to live within your means.
1. Clothing/Jewelry
Is what you are looking for practical and useful? If not and you can afford to buy it outright after all your financial responsibilities are tended to, then buy all means make that purchase. However, if you are pulling out credit cards with payments you still owe, or overstretching your budget by dipping into food or housing expenses, then chances are your decision of clothing, shoes, jewelry or watches should be reconsidered until you have that straightened out.
2. Luxury Travel
Sitting by a beautiful beach of rolling tides, sipping a pina colada, and gazing at glistening sands sounds amazing to pretty much anybody. Now unless you have been working like a dog, you are on the verge of a break down and haven’t had a vacation like that since you can even remember, it’s pretty safe to say you may have to rethink this one through. Not that you don’t deserve it, but really unless you have saved your money or can guarantee you can pay this off with a quick turn-around, your relaxing vacation can turn into a financial nightmare quickly. Either save up or take a super low key vacation within your budget.
3. Dining out or Nights on the town
Fancy dinners are great, so are nights out with friends, until we get the check. Reality hits quickly after you realize how fun outings can be expensive. Before going out it’s always worth checking if you can swing it financially, if not maybe take a rain check or plan on having an occasional splurge night knowing you will pay off any debt accumulated immediately, and actually do it.
4. Accessories or Gadgets
James Bond has some incredible gadgets; then again he is James Bond. So unless you have some gold bars locked away in a vault make sure your purchase is actually something based in financially realistic terms. Be aware that technology and gadgetry are consistently being modified and updated. If you must have it, realize it always comes with a price it’s up to you to be responsible for that decision in the long run.