Confusing Personal Finances - Dealing with Confusing Personal Finances

Perhaps you have already come across conflicting advice on personal finance. One expert or website says one thing, while others say something else entirely. And personal finance is something you cannot ignore. Yet it becomes quite tough with so much conflicting advice. Who should you believe? Who is the real expert? Why is there so much different advice on emergency funds, debt and homeownership?

One reason why you find so much conflicting advice out there is because personal finance is personal. There is no one-size-fit-all solution.

You may get a lot of data and math, yet when the numbers force you to do something that lies outside your comfort zone; it is not a good solution.

So what can one do? How can one make sense of numbers and align our habits and calculations with the official math? This is something we shall try to answer in this article.

First of all, let’s talk about…

Good Debt and Bad Debt

There is no such thing as ‘good debt’, no matter what experts say. There is nothing called good debt even if you use it to pay for college or to buy a house. Dave Ramsey, one of the most well-known financial experts, is one who is strictly against this idea that debt can be ‘good’.

At the other end of the spectrum, Robert Kiyosaki, the writer of the well-known book Rich Dad Poor Dad, says that the wealthy use good debt to grow their financial worth. They use it to invest in cash flowing assets and use money from investors and banks.

Debt Elimination

• Financial experts don’t just disagree on the question of debt, but also offer different advice on debt elimination and debt management. However, here are two most common debt elimination strategies.
• Debt Stacking Method: In this strategy, you start paying off your debt that has the highest interest rate first. As you can understand, many experts swear by this strategy as it enables you to free up cash faster. For instance, if you have several credit cards with debt, start paying off the one that has the highest interest rate.
• Debt Snowball Method: Other financial experts tell you that you tackle that debt first that has the lowest balance. It is believed that a system that is front-loaded with rewards is good for keeping one on track. Small victories keep one going.

Now, paying off those debts that have a high interest rate is certainly a smart move. However, personal finance is not always a math equation. It is also ruled by emotion, in which case the Debt Snowball Method works better. Personal finance is psychological as well.
Should you buy a home or rent a home?

Here’s another field where you’ll see a lot of conflicting personal finance expert advice. Some will say that you are making a big financial mistake if you are not prioritizing your home ownership.

Others say that buying a home is one of the worst financial decisions you can make, and that it is hardly worth the name of an ‘investment’.
More conflicting personal finance advice

Debt elimination, debt and renting and buying properties are some fields where you’ll get different advice. Experts disagree on these issues. However, they disagree on other issues as well, such as using credit cards, ways to build emergency funds, earning more money, purchasing a car, investing and retirement.
Closing thoughts

When learning about personal finance, you are bound to come across conflicting views. When you do, do not let them discourage you, take the advice that is best during the current situation, decide what works now and what will work in the long term, and be flexible enough to change your plans.

Difference Between Good Debt and Bad Debt

Almost everyone has had a debt at some point in time. These can be personal loans, business loans, mortgage, or its various other types. Our growing, excessive wants, coupled with overzealous credit marketers are at play here. Borrowing is not a problem. However, if one is not able to pay back loans, and if one needs an ongoing series of new loans to pay back the last one, then it is a bad debt spiral.

Because of this, it helps to separate Good debt from the bad debts, which aids in keeping your obligations under control.

Let us first look at what Good debt is.
What Is Good Debt?

You may be confused at this point. After all, we were told that all debt is bad.

So from where on earth does the notion of Good debt come? Can debt be good? And what is bad debt then?

Good debt is something that enables you to make more money. You can practically gain an income through it. Thus, good debt is very similar to an investment.

One more good thing about it is that it has very low rates of interest.
Are There Any Examples of Good Debts?

Home loans are a great example. These are cheap and easier to get in the market. Home loans also come with several tax benefits. When you buy a home, you are getting an asset. This asset can give you more money in the future through value appreciation.

Another example is an education loan. Getting a good education will pay off in the long run. Getting a loan for education is a good investment, and also a Good debt.
Types of Good Debt

Some types of good debt are:

• Mortgage
• Student loan
• Small business loan
• Credit cards
  

Are Good Debts All That Good?

Good debts are excellent as long as you use them well. The problem arises when there are too many good debts. What happens is that people often overextend themselves.

For instance, a couple may take a loan to buy a dream house that is well beyond their means. Even when they get such a loan, it leaves very little monetary maneuvering space. There may not be enough funds for meeting an emergency, as they would need to sacrifice a significant part of their income to pay back the loan.

The solution? Make down payments of 20% of the property at least, while limiting borrowings to a minimum.

Now that we have learned about Good debt, it is time to learn about bad debts.
What are Bad Debts?

Bad debt, as the name suggests, is the opposite of Good debt. While the latter creates more money for you, the former leads you to depreciating assets. A car loan is a classic example of this.

Car’s by themselves have value depreciation. Did you know that the moment you buy a new car, its value depreciates by 20%?

Consumer loans, personal loans, and credit card loans are also examples of bad debts. When you buy anything that you otherwise can’t afford with a consumer loan is bad debt. It is not a smart financial move either.

Paying your credit card bills on time is excellent, but not so when you start delaying the payments. In the latter instance, it also adversely affects your credit score.
Don’t Use Good Debts to Pay off Bad Debts

It may seem normal to get a new loan to pay off a previously taken loan, but it is not a smart thing to do. You may get a lower interest rate when you get a remortgage, for instance, but that will not be a smart financial decision. This is because your home will still be kept as collateral, meaning it will be taken away in case you are not able to repay this loan. The second problem is that a remortgage stretches out your repayment period.

While you can surely consolidate multiple debts, doing this puts your most prized assets at risk.
Keep an Eye on Your Debt-to-Income Ratio

You need to keep an eye on this ratio as well, because this is one factor that directly affects your Credit Score. A good rule of thumb is to make sure that EMI payments are 35% of your take-home income.

Dealing with Confusing Personal Finances - Good Debt and Bad Debt

One reason why you find so much conflicting advice out there is because personal finance is personal. There is no one-size-fit-all solution.

You may get a lot of data and math, yet when the numbers force you to do something that lies outside your comfort zone; it is not a good solution.

So what can one do? How can one make sense of numbers and align our habits and calculations with the official math? This is something we shall try to answer in this article.

First of all, let’s talk about…
Good Debt and Bad Debt

There is no such thing as ‘good debt’, no matter what experts say. There is nothing called good debt even if you use it to pay for college or to buy a house. Dave Ramsey, one of the most well-known financial experts, is one who is strictly against this idea that debt can be ‘good’.

At the other end of the spectrum, Robert Kiyosaki, the writer of the well-known book Rich Dad Poor Dad, says that the wealthy use good debt to grow their financial worth. They use it to invest in cash flowing assets and use money from investors and banks.
Debt Elimination

Financial experts don’t just disagree on the question of debt, but also offer different advice on debt elimination and debt management. However, here are two most common debt elimination strategies.

    Debt Stacking Method: In this strategy, you start paying off your debt that has the highest interest rate first. As you can understand, many experts swear by this strategy as it enables you to free up cash faster. For instance, if you have several credit cards with debt, start paying off the one that has the highest interest rate.

    Debt Snowball Method: Other financial experts tell you that you tackle that debt first that has the lowest balance. It is believed that a system that is front-loaded with rewards is good for keeping one on track. Small victories keep one going.

Now, paying off those debts that have a high interest rate is certainly a smart move. However, personal finance is not always a math equation. It is also ruled by emotion, in which case the Debt Snowball Method works better. Personal finance is psychological as well.
Should you buy a home or rent a home?

Here’s another field where you’ll see a lot of conflicting personal finance expert advice. Some will say that you are making a big financial mistake if you are not prioritizing your home ownership.

Others say that buying a home is one of the worst financial decisions you can make, and that it is hardly worth the name of an ‘investment’.
More conflicting personal finance advice

Debt elimination, debt and renting and buying properties are some fields where you’ll get different advice. Experts disagree on these issues. However, they disagree on other issues as well, such as using credit cards, ways to build emergency funds, earning more money, purchasing a car, investing and retirement.

Dealing with Confusing Personal Finances - Good Debt and Bad Debt

 One reason why you find so much conflicting advice out there is because personal finance is personal. There is no one-size-fit-all solution.

You may get a lot of data and math, yet when the numbers force you to do something that lies outside your comfort zone; it is not a good solution.

So what can one do? How can one make sense of numbers and align our habits and calculations with the official math? This is something we shall try to answer in this article.

First of all, let’s talk about…
Good Debt and Bad Debt

 There is no such thing as ‘good debt’, no matter what experts say. There is nothing called good debt even if you use it to pay for college or to buy a house. Dave Ramsey, one of the most well-known financial experts, is one who is strictly against this idea that debt can be ‘good’.

At the other end of the spectrum, Robert Kiyosaki, the writer of the well-known book Rich Dad Poor Dad, says that the wealthy use good debt to grow their financial worth. They use it to invest in cash flowing assets and use money from investors and banks.
Debt Elimination

Financial experts don’t just disagree on the question of debt, but also offer different advice on debt elimination and debt management. However, here are two most common debt elimination strategies.

    Debt Stacking Method: In this strategy, you start paying off your debt that has the highest interest rate first. As you can understand, many experts swear by this strategy as it enables you to free up cash faster. For instance, if you have several credit cards with debt, start paying off the one that has the highest interest rate.

    Debt Snowball Method: Other financial experts tell you that you tackle that debt first that has the lowest balance. It is believed that a system that is front-loaded with rewards is good for keeping one on track. Small victories keep one going.

Now, paying off those debts that have a high interest rate is certainly a smart move. However, personal finance is not always a math equation. It is also ruled by emotion, in which case the Debt Snowball Method works better. Personal finance is psychological as well.