Let’s face it, if you want to get ahead in today’s world, you’re going to need to go into debt, at least a little. The key is managing your debt properly and avoiding common traps. Not all debt is bad, even if we have been trained to think that it is. Going into small amounts of manageable debt with a goal of increasing your future income is known as leveraging your debt and this is a very smart practice.
Before you rush out and apply for credit cards willy nilly, there are
a few things that you need to consider before going into debt. It is
all too easy to fall into a bad debt trap, when you could have used
those funds much more wisely. Let’s go over a few points that you must
never forget when it comes to handling debts.
First and foremost, never go into debt beyond your means. This is not
a good strategy and it rarely pays off. If you’re just starting out,
you want to keep the amount of overall debt to a small amount that you
could easily pay off if you had to. This helps you build up your credit score
and helps you learn the ropes of proper debt management. It’s a good
rule of thumb to keep your initial debts to less than three months of
your current salary. This will make sure that you don’t get into too far
over your head, but you should still have enough resources to leverage
your debt properly.
Next, you never want to max out any credit card or blow through a
loan. It’s easy to think of a loan or a credit card as free money, but
it is anything but. Credit cards can have interest rates as high as 30%
and once you start that process of maxing out a card, you’re going to
have to deal with over limit fees (check out How A Credit Card Limit Is Determined),
higher interest rates and it will take longer to pay back that debt.
Use your loans and cards wisely, and leverage them to start making money
for you. This means that you should avoid frivolous spending and focus
on how to make that debt pay off for you in the future.
Lastly, it is vital to make sure that you are able to keep making
your payments so that your debt doesn’t ruin your credit rating. One of
the easiest ways to give yourself an insurance policy is to add up six
months of your monthly minimum payments and put this aside in a savings
account. If you should lose your job, you’ll have that six month cushion
that will help you stay on track with paying your bills. This is a good
strategy for all of your bills actually and can be very useful in many
The key to proper management of your debt is using your debt for the
right reasons. Spend that money wisely so that instead of ending up with
a bunch of things you don’t need, you’ll have income coming in thanks
to your leveraged debt.