Don't Let Debt Hide a Spending Problem
Pay Off the Loan Before You Use Up What It Buys
Debt is a useful tool. If handled with care.
Don’t borrow to live beyond your means. To borrow within your means, pay off debts at least as quickly as you use up what you buy on credit. For example:
- If you put a fancy dinner “on the card,” pay it off when the monthly bill arrives.
- If you borrow to buy a car, pay off the loan before the car stops running.
Interest Is Part of the Price You Pay
Just Like Taxes and Delivery Costs
If you buy a $1,000 TV “on the card” and pay it off in three years, you’ll pay $1,000 for the TV plus $250 in interest (assuming a 15% interest rate on your card).
Would you buy the $1,000 TV, knowing it costs $1,250?
Keep Payments Within Your Comfort Zone
So You Can Handle a Sudden Expense or Drop in Income
Most banks won’t give you a mortgage if your fixed payments – the mortgage, real estate taxes, insurance, alimony, child support and credit card and other debt payments –consume 45% of your income. So keep your total fixed payments well below 45% of your income. Far below if your job or income is not secure.