Controlling Debt
By JD Esajian on September 27, 2013
Almost everybody is concerned with controlling debt on one level or another. Mortgages, credit cards, auto loans and retail store accounts are all examples of items that produce debt. The key to true financial success, however, is to control your debt. Know the difference between good debt and bad debt. It can be easy to spend money on items of luxury when you have it. This may be acceptable if you have constant cash flow, but if not, controlling debt may be too difficult to overcome.
The average American household has over $15,000 worth of credit card debt. If you want to see your investing business take off, you need to know where to spend and where to save. If you are rehabbing and you put household materials on your credit card, with the intent of paying it off in 90 days, you are utilizing credit properly. If you are making your car payment or buying groceries every month on credit, sooner or later, that credit source will run out and you will be in over your head.
The best form of debt, considered “good debt,” is from mortgages. You can argue whether or not a mortgage is an asset or a liability, but for the tax benefits alone, you can see a tangible benefit. You can write off the mortgage interest payments and some of the deprecation, meaning that regardless of what your cash flow situation is on the house, you may get a tax refund at the end of the year. Aside from that, if you are renting, you are using someone else’s money to pay down your mortgage and afford you that tax benefit. This benefit may not be realized month to month, or even every tax season, but over the course of years when your home is paid down, you will see the benefit.
The idea of paying 15% in interest for the use of a big screen TV or a nice couch isn’t very appealing. You are not making any money from your TV, couch or any other household purchase. Debt like this will put you in a hole that you won’t be able to come out from. Even business expenses like lunches, dinners and even golf outings are more beneficial than big ticket purchases. At least you can write off the meals and you may be able to secure a contact from them.
Many successful investors will tell you that they don’t have a debt problem, they have an income problem. However, it is all associated with controlling debt. The amount of spending you do is directly correlated to your bottom line. If you are spending money on marketing, networking or any other segment of your business and you are not seeing a real benefit from it, you are not spending your money very wisely. If you have put these expenses on credit, you are now going backwards and they are costing you money every month.
The best way out of debt is to watch every expense you make. If you see exactly what and where you are spending ever month, it could be the eye opener you need to make a change. Before you make an expense, ask yourself why you are making it and what are you getting for it. Sometimes the answers may be obvious, but many times you can find a better and cheaper way to spend. If you aren’t smart with controlling debt, it will control you.