Debt....The Good, The Bad and The Ugly

First off…I admit that I have never watched this movie.  I don’t really like westerns. #sorrynotsorry (Is it still cool to use that hashtag?) However, I did google it and read the summary on Wikipedia because it never lies.  Have no fear I will provide you with the condensed version here in case you haven’t watched it too.

Apparently three guys (One good, one bad and one ugly) get together to find a bunch of gold buried in a cemetery.  Some double crossing ensues, there is a Mexican standoff and the “Good” guy wins and gets the loot.  Lesson…good always prevails.

So, what has that got to do with debt?  Everything. Just like there are different types of people in this world you also have different types of debt.  Knowing which kinds of debt are out there will help you in achieving your financial success because let’s face it…debt can be unavoidable.  Now most people assume that it is the type of debt that is good, bad or ugly and that it true when you compare ‘Pay day loans’ to ‘mortgages’ but it also comes down to the reason you are incurring the debt that decides whether it is good or bad.  Bottom line is that if you use debt properly it can be very beneficial, but it can be disastrous if you don't.

The Bad...

Bad debt should generally be avoided at all costs.  In the movie, ‘Angel Eyes’ is The Bad.  He is ruthless, unmerciful, unfeeling and deceitful.  He is there for all the wrong reasons.  He arranges the partnership to find the gold but then constantly double crosses the other two when the opportunity arises. This is also true of bad debt, at first glance it seems like it is helping but you quickly realize that it has backfired on ya.

debt that has lots of incentives and really small print

This is where you had the intention of paying in full for the purchase but are then swayed by fancy incentives with small print clauses you didn’t read.  It hooked you by offering ‘no payments for 12 months – interest free’ and that sounded great, because now you can use the money you were going spend on other things.  Then when you go to start paying it back one year later you are shocked to find they have added on that entire year of interest because you failed to pay it off in those initial 12 months that they stated you didn’t have to pay anything.  Tricky b@stards. 

Rule of thumb…you should never get this type of debt unless you can pay it off in full before the interest deadline.  Actually just pay for it up front…..you were going to anyways.

…the reason that you are incurring the debt that is bad…

This is where you rack up debt trying to keep up with the Kardashian’s.  You see everyone with their shiny cars, vacations and lives and think I should have that too.  So you pull out the plastic or put it on the line of credit without any thought as to how you will be paying it off.

Rule of thumb…it is only acceptable to use credit for “wants” vs “needs” if you have a VERY SHORT TERM REPAYMENT PLAN.  Yes, I just yelled that.  Because I need you to really listen to me on this.  Using credit this way becomes very dangerous very fast because it is easy to get more credit when you run out.  There are hundreds…..thousands of types of credit cards and they all want you to have their version.  If you are not careful and diligent you could end up with $60,000.00 in credit card debt at 19.99%.  I have seen it.  It is real.  If you need me to help you by slapping your hand every time you reach for your credit card just let me know.  I love you that much. #callme

The Ugly…

Ugly debt is a necessary evil.  In the movie ‘Tuco’ is The Ugly character and they aren’t referring to his looks.  He gets the job done but not in the best way necessarily.  He is comical at times, a little cagey and definitely resilient seeing as though he didn’t get the gold but Blondie leaves him alive, so in the end it is a win….kind of.  This applies to the ugly type of debt so to speak, it can seem dirty or rough at times but in the end it works out.

…Unexpected Expenses...

We all have the best intentions, like not eating that second piece of cheesecake or going to the gym five times a week, but then life throws up in your lap and you are facing a large unexpected cost.  In a perfect world we would all have 3-6 months’ worth of salary put aside for emergencies but if you have children you know how quickly those lovable little money eaters will put a damper on that dream.  Don’t have children?  Want mine?  Just kidding, my husband would kill me. 

Annnnnnyway….let’s get back on track.  We aren’t always ready to replace a furnace, re-shingle a house or pay for a plumber to replace all the toilets in your house after your hubby “attempted” to fix them…so sometimes we need credit and that is what makes it ugly.  We would prefer not to use it but sometimes we have no choice.

*Author's note...a sudden trip to Mexico doesn't qualify as an unexpected expense so get that out of your head right now.*

Rule of thumb... have an exit strategy.  Yes it is unexpected, yes it sucks, now make it better!  It will only stay “ugly debt” for as long as you ignore it.  So make a plan to pay it off.  We did renovations to our living room and dining room because carpet in a dining room (especially with a kid) is gross.  We didn’t have the money on hand but we had a line of credit.  So yes even though we didn’t want to borrow we needed to.  But we figured that adding an extra $150.00 a month to our line of credit payment would have the reno paid off within the year which made it bearable.

The Good…

Good debt, most people believe this is as mythical as a unicorn but I am here to tell you a secret.  I work with a unicorn (true story) and there is such a thing as good debt.  In the movie ‘Blondie’ is The Good, he is a bounty hunter with a conscious just trying to do the right thing.  In the end he gets the gold, kills The Bad and takes pity on The Ugly, Hollywood at its best.  This is debt when it is used properly, not only does it get the job done but it is really helpful.

…Mortgages...

Most mortgages are good debt.  It is not likely that you can purchase a house without the assistance of a mortgage and therefore that makes mortgages good debt.  You are using debt to buy an asset that appreciates in value. 

However, a mortgage could be bad debt if you aren't careful… like when you are house poor. Don't know what house poor is?  Let me explain...there is a difference between the amount you can get approved for and the amount you can actually afford to pay as a mortgage payment. 

The lending institution uses a standard formula to pre-approve you for a mortgage using payments for heat, taxes and other debt to a percentage of your income.  This can lead to a mortgage payment that when you factor in your other expenses like food and gas leaves you feeling stretched very thin.

Rule of thumb... Even if you are approved for a house purchase of $1,000,000.00 and a payment of $6000.00/month, ask yourself if you can realistically afford that with your other living expenses.

…Credit Cards...

I know what you are thinking, “Caval you opened this article talking about Bad debt and you place credit cards right in that category, how can they be in both places at once?” 

Listen Linda, I need you to hear me out on this one.  Debt can be double sided.  I also mentioned how mortgages can become bad debt so it stands to reason that credit cards can be good…if used properly. 

Let me start by saying that this takes discipline. LOTS OF DISCIPLINE! I MEAN A LOT OF DISCIPLINE!  You picking up what I’m throwing down?  Good. 

A lot of credit cards come with benefits that people are not taking advantage of, like points and extended warranties (double check with your credit card company to see if any apply to you).  These points can be used as cashback or for travel.  Extended warranties mean you don’t need to buy the extra insurance from the store.  These are just a few automatic benefits if you make the purchase with your credit card. 

Here is where the discipline piece comes in…you must never carry a balance on your credit card from month to month.  Yes, you heard me right. 

I use my credit card for EVERYTHING.  If I could pay my mortgage with it I would but apparently that is against the law.  However, I pay it off EVERY DAY.  I pretend it is my chequing account, so by paying it off every day I can see how much money is left in the account until next pay day.

By not carrying a balance from month to month I avoid paying interest.  This allows me to build up points that I earn on purchases I needed to make anyway.  The hubby and I have joint credit cards so we build and pool the points together.  Remember how I stated I just came back from Vegas in my last post?  Points paid for that. 

*Author's note…if you do not have the discipline to pay this off every day or at the very least pay it off in full at the end of each month, do not do this.  Credit cards are not long term debt.*

Rule of Thumb... discipline is everything.  If you have no discipline do not use credit cards.  There is no if, ands or buts about this one. 

Let’s wrap this up just like the movie with a good ol’ fashioned Mexican standoff

The Bad: 

·         Debt that has too many clauses or seems too good to be true.

·         When you incur the debt for the wrong reason, like trying to keep up with the Kardashian’s

The Ugly

·         Debt that isn’t wanted but is necessary

·         Usually due to unexpected circumstances

The Good

·         Used to buy assets that appreciate in value

·         Used smartly and with discipline to take advantage of benefits

Obviously The Good wins out just like in the movies, but now that you are aware of the other two you can start to approach debt smartly and consciously.  People often are hard on themselves when they see that they are carrying debt but we need to remember the reason we have this debt.  We must also remember that debt is a necessary part of life and that if used properly it can be very beneficial and help you to accomplish your dreams.  This is an integral part of creating your own wealth success story because only when you in control of your perceptions are you in control of your success. 

Have you been or are you currently struggling with debt or the feelings surrounding debt?  I would love to hear your story.  Feel free to share in the comments or email me privately.

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