Assessing affordable debts
There are debts that are repayable
without much inconvenience and it should be easy to recognise if they
can be afforded. These debts can take the form of new clothes or food
shopping paid by a credit card. Other more significant debts are not so
easily assessed. These debts can take the form of buying a car using a
loan or finance arrangement, or even buying a property. Large debts
require careful assessment to gauge whether or not they are affordable.
Planning a financially safe future
Financial budgets are vital when it
comes to future and present finances. It’s easy to allow debts to
continue for years but it definitely doesn’t make financial sense.
Setting out a financial budget will help to assess timescales when it
comes to debt. A financial budget or plan will help to break down how
much purchases will actually cost in total when bought using credit.
Present income versus expenditure will be part of the plan but debts
that are still being paid in five years time should also be part of the
picture.
Can you afford large debts?
Items purchased on credit, such as a new
car, are major debts. Some people will simply go ahead and take on this
debt without giving the future much thought. Repaying a large debt over
many years will drain money in terms of interest payments; the longer
the repayment schedule, the more interest. A good rule of thumb for high
price purchase items should be the length of repayment. If an item such
as a car cannot be paid for in five years then this debt is really not
affordable.
Good debts versus bad debts
Not all debt is bad and some debts will
actually pay off in the long run. A new car decreases in value as soon
as it leaves the showroom so isn’t really a good debt. A house can be
seen as a good debt due to the fact that home owners are likely to make a
profit when it comes to selling. Buying a home is also generally seen
as the smarter option to renting; renting will not provide any financial
return. Good debts should be taken into consideration when it comes to
assessing debts that can and can’t be afforded.
Assessing good versus bad debts
It’s useful to know what are actually classed as good and bad debts. Good and bad debts will include –
-Property purchases such as homes (good debt)
-Renting property for long periods (bad debt)
-New vehicle purchases (bad debt)
-Student loans, investing for the future (good debt)
-High interest loans such as payday loans (bad debt)
-Household purchases such as televisions using financing over many years (bad debt)
Can a mortgage debt be afforded?
Property is one of life’s major
purchases and although this ranks in the good debt category it is still a
large debt. Most people have no other option than to buy their home
using loans and financing. There is a guiding rule that may help as to
whether or not a mortgage is an affordable debt. Mortgage payments
should not exceed 30 per cent of take home pay per month; this is after
taxes have been paid. This sounds easy enough to calculate but mortgage
payments can last for decades, and decreases in future income should be a
factor.
Building a financial nest egg into a budget
Even when purchasing good debts such as a
mortgage there are variables. Financial instability can occur at
anytime without notice. Interest rates can increase as can mortgage
payments. This is why it is important to build up savings in case income
does decrease for any reason. Think of these savings as a safety net,
something that can be used to weather any financial storm. Assessing
future debts and savings will determine whether a debt can or can’t be
afforded at the present time.
A financial budget is the best way to
assess whether or not certain debts can be afforded. The budget should
also figure in future purchases that are unavoidable or simply make good
financial sense. This is a long term financial forecast. Although there
may be some unforeseen financial bumps the budget should be a good
guideline to recognising debts you can and can’t afford.
Source: goingdebtfree.co.uk
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