Debt Ranking..
“One day I will get serious about removing all of that debt that has been adding up for years.”
This statement has been echoed by many people over the years and has only been true in cases where the person won the lottery. Chances are that if it took you so many years to accumulate all of that debt, it will not go away over night, it will just as much, if not more time to completely erase the debt.
Comparison..
Losing your debt is exactly like losing weight, you spent so many years eating improper food, gaining tons of weight, and then you expect to lose it within a couple of days. Then when you realize the weight won’t go away immediately, you give up just like you would with paying off your debt. The truth of the matter is, you can’t crash diet and you definitely can’t crash budget.
Purpose of Article…
This article is not designed to tell you why you should pay your debt off or to try to motivate you. The whole purpose is to help you rank your debt so you know where to begin. Before you begin paying off your debt, you must sit down and realistically rank your debt. Obviously ranking your debt sounds too ambiguous, so below I have a very simple ranking method.
1. Bad debt-Credit card
2. Bad debt- Automobile
3. Decent debt
4. Good debt- Student Loan
5. Good debt- Mortgage
Ranking methodology..
This list is just a rough guideline for ranking your debt, obviously there are different forms of debt that are not covered in the list but you can use common sense to rank them on the scale of 1-5. The reason credit card debt is considered the worst form of the debt is because it usually has the highest interest rate and because it tends to be non-essential purchases. Mortgages and student loans are good forms of debt because they are both purchases that will arguably improve your quality of life and usually have lower interest rates.
Process..
Once you have ranked your debt you must begin paying it off from the top. Every time you pay off a debt you remove it from your list and work your way down the list. Paying it off sounds easier than it sounds that is why you should have a clear plan outlined, directly related to your current salary. Usually the best way to make payments is by doing automatic deductions from your pay check, so that you yourself do not actually have to make any transactions. By not even seeing the money, you will have no opportunity to spend the money, putting you on the right path. Remember this process will be very long, but as soon as your debt is paid off you may begin saving and planning for your retirement.
Go ahead! Rank your debt..
November 13th, 2008 at 6:17 am
Hey man you finally got your site running, congrats. Hopefully I can open up my real estate investing blog soon. Here is my debt ranking:
1.Student loan (currently at 20g’s even though I am still in school)
2. Credit card (only at 1g but mostly useless stuff)
At least I only have two things to rank, that’s my optimistic thinking.
November 13th, 2008 at 6:27 am
Thank God I am done school and have no student debt, on the flip side I do have other debt.
1. New automobile- $5,000 left to pay
2. Credit card- $1,0000 left to pay
3. Mortgage- $ do not even want to think about it
November 13th, 2008 at 2:28 pm
Yeah, I think that people hear the word ‘debt’, and they automatically cringe. It’s important to understand that not all debt is bad. Some debt is good, like you mentioned. Most people wouldn’t mind taking on a school loan payment, because of the all of the rewards that an education adds to your life. Some debt is required to start a business or to acquire investment properties. A smart investor learns how to accumulate and leverage debt in the right ways. If you were to purchase a property, and your mortgage payment was $1000 a month, but you rented it out for $1250 a month, that debt that you accumulated is generating income. You would be making money with money that wasn’t yours to begin with.
Very good article.
Caleb
November 14th, 2008 at 11:10 pm
Bad debt is especially important to understand when discussing student loans in England. They are thankfully at an amazingly low rate meaning you can put the surplus in a much higher savings rent and make money from money being loaned to you!
By the way I was disappointed to see there are only a few articles here but then I realised that this hasn’t been running long. I wanted to say I love the lay out. As a student, I know that students can relate to this better and the name studenomics is catchy and memorable. Well done for setting up such an accessible site. I wish you all the best and look forward to posting more comments about various student financial activities in my life.
November 14th, 2008 at 11:12 pm
My ranking is:
4) Good debt = Student Loan currently (after 3 years) at £20375.
But to counteract I have £10,000 in savings from the earnings of part-time jobs since I was 13, grants and bursaries.
November 15th, 2008 at 7:56 am
I know what you are saying, some student loans in given areas are way easier to attain. There is nothing wrong with providing students with financial aid, the issue lies in providing too much funding to the point that it becomes absurd. I have also seen young people spend student loans on purchases like cars and clothing. I appreciate your comments..
December 31st, 2008 at 3:38 am
Great list. They are some many bad debts out there. I would like to disagree with you on the student debt as good debt. I know you are trying to justify that by going to school you will make more money but most of the students never pay off their private loans.
Can you explain why you think student debt is a good debt?