KD Strategies The 5 Steps Step 2
| Step 2: Eliminate Bad Debt |
|
Step 1 | Step 2 | Step 3 | Step 4 | Step 5 We have to eliminate bad debt. First, debt is not necessarily always a bad thing. Indeed, there can be such a thing as a good or creative debt such as borrowing money against your home and investing it wisely and thoughtfully, while writing off the interest on the borrowed sum on your income taxes. What is bad debt? Bad debt is non-deductible debt that your are paying interest on such as credit cards, lines of credit, loans and mortgages. This is debt that you pay for. What is good debt? Good debt is deductible debt that you are using to invest and is paid for by someone or something else. Many people are trapped in the circle of bad debt, borrowing money all the time to purchase things that will only drop value or depreciate, such as an automobile or a plasma TV. Sometimes, people have to keep borrowing money to keep up with paying debt, becoming slaves to interest. It is alarming the gigantic debts being run up by Canadians, often thanks to credit card companies’ handing out credit cards like candy. Credit Cards should be used for monthly expenditures and paid off every month in full. Never pay Credit Card interest! Paying Down Bad Debt: Closed Circle – Establish budget totals to determine your available income to service debt on a monthly basis. Overflow – As you close your circle and get in control of your finances, you will have overflow that will allow you to get out of debt faster. Debt Reduction Strategies – There are several strategies that can help you get out of debt such as debt consolidation (Manulife One) and the G.O.O.D. (Get Out Of Debt) Plan. You must look at arranging your financial affairs in a way that minimizes interest payable. To do this, we must first look at a Balance Sheet or Net Worth Statement, consisting of assets and liabilities. Formulas: A = L Assets equals Liabilities A > L Assets are greater than Liabilities A < L Assets are less than Liabilities |