Spend Now… Pay a Lot Later – Debt

Debt – borrowing money so you can buy today what you can’t afford on your own.

If you don’t have money to buy an expensive TV now you likely wouldn’t have that money in 30 days when your credit card payment is due. Now you are not only paying for the TV but also paying to borrow money to buy that TV. These payments are making someone else rich and preventing you from saving. Pretty easy to agree this is something to avoid when trying to save.

Decrease interest now:
1. Calculate all your current debt (credit cards, student debt, car loan, mortgage, etc.)
2. Order it from highest interest rate to lowest
3. Pay it off in that order until you are paying less interest than your highest return investment (e.g. if you pay 3% on your mortgage but are making 5% on a bond you are better off to leave your money in the bond than sell it to pay back your mortgage)

Ongoing debt prevention:
1. Only spend what you have!
2. Set up auto pay so you are never behind
3. Save regularly – you will have the cash to buy the next big thing (consider a savings plan)

Still not convinced?
Good debt: borrowing money to invest. The most common of these are mortgages, student loans, and maybe even auto loans. They help you invest in yourself and your future financial security. A quick check – are you buying this to?
Buy an asset (aka a home or investment)?
Enable future income (aka education or a car)?
If yes to either of those go for it. If not think really carefully about it.

Bad debt: spending money that you don’t have on things you don’t need. This is where debt get’s its bad name. The obvious offender here is credit card debt but should also include lines of credit or store payment plans. If the thing you bought isn’t going to make you money it is probably bad debt. This is an interest trap that will have you spending more than you need to.

Links
How do you stack up on to the average Canadian (Canadian savings rates)

And compared to other Canadian millennials (an interesting article by CBC)

The benefits of saving (compound interest)

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