Now that you’ve evaluated your cash flow, it is time to move on to the next step of evaluating your finances to see if you’re home buyer ready. Examining your current debt load can be an eye opening experience for anybody.
Types of Debt
All debt is not created equal. The two major categories of debt are secured debt and unsecured debt. Secure debt is debt that is secured by an asset. Common example of secure debt include car loans (secured by a car) and mortgages (secured by a house). Unsecured debt is debt that you agree to pay back with a lender without providing collateral via an asset.
Here’s a list that provides examples of each type of debt:
- Car Loan
- Furniture Loan (Line of Credit)
- Some personal loans
- Credit Cards (Store cards count, too)
- Student Loans
- Payday Loans (Always a no-no…ALWAYS)
- Some Personal Loans
Minimizing Your Debt
If you are carrying a significant debt load, your best bet is to start minimizing debt as soon as possible. Why add another $150K on top of your existing debt? Debt is like a weight dragging you down and away from achieving your financial goals. Pay down these debts so that you have additional funds to set aside to save for, say, a house. Clearing out as much debt as you can frees up additional funds you can put towards other parts of your life.
There is a great tool called PowerPay.org that can help you create a plan to pay off your debt as quick as possible while saving you money on interest. There are no gimmicks. It is 100% free. You can create a pay off calendar, look at adding additional payments, prioritize paying off your debt, and even set a date to be debt free. PowerPay.org will generate a customized plan just for you.
I can’t remember where I read this, but I found it to be so true; “Don’t buy anything on credit that depreciates in value.” If you think about it, if you buy something on credit, now you’re paying interest on it. Once you’ve purchased that item and put it to use, that item depreciates in value. And you know what that means? Now you have to pay more for the item than it is actually worth. Burn.
If you’re only making minimum payments, stop right here. No buying a house for you (said like the Soup Nazi)! Your number one goal should be paying down debt and getting in control of your spending.
If you’ve got your debt under control, and you’re actively saving, move on to Part 3: Protecting Your Self.
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