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Asset Acceleration Planning, LLC |
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Debt Management The recent "sub-prime mortgage crisis" exposed the world's problem of debt mismanagement. Now we know just how devastating debt can be. But this is not something new. In Sep 17, 1796, George Washington in his farewell address warned Americans "... as an important source of strength and security cherish public credit ... avoid likewise the accumulation of debt ..." Sadly, neither the politicians nor the majority of citizens have followed his advice. George Washington would consider today's U.S.'s debt problem as catastrophic. According to the Congressional Budget Office estimates the 2009 budget deficit at $1.2 trillion or 8% of the U.S. GDP. That's before the Obama administration's "stimulus package". The 2008 deficit was less than $450 billion or 3.2% of GDP. In a matter of a few months, we have more than tripled the National Debt! While there is little one can do about our national debt, (other than vote the rascals out) -- your personal debt is another matter. At AAP, we approach debt management in the following manner. First, determine your level of debt, then categorize
it. These categories include; student loans, credit cards, installment
loans, business loans, mortgages, and home equity lines of credit. Some
financial advisors claim there is good debt and bad debt.
(But if you think about and consider it
from George Washington's point of view, there isn't any good debt. At times it may be necessity for such
things as:
education, or business expansion. In both cases it offers a return on investment which exceeds the total cost of the debt.) More than six years ago, Tom Gmuer, AAP financial counselor, said the following. “Credit card debt is as smart as playing with downed wires – sooner or later you’ll be burned by higher interest rates and overwhelming debt.”
For those who consider some debt okay, normally they make the distinction as shown in the table below.
Second, compute your "debt - to - income ratio". This ratio is scored against certain ranges. Specific actions may be recommended based on your score. Third, develop an understanding of the reasons for your borrowing. Fourth, establish the optimum order and schedule for debt pay down. The prudent course is to avoid debt, but if you must borrow money, use credit wisely. Then there is the situation when you wish to use credit wisely, but your credit is bad. The following section deals with repairing your credit.
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