Getting Smart About Your Debt





Getting Smart About Your Debt

 

Americans' recent push to eliminate
their debt is placing many families at risk. The most recent Federal Reserve
Bank of New York Quarterly Report on Household Debt and Credit shows
that Americans reduced their debt by approximately $100 billion since the
fourth quarter of 2011. However, according to Certified Financial Planner Board
of Standards, Inc. Consumer Advocate Eleanor Blayney, CFP®, Americans who
reduce debt without setting up a plan to manage it, risk their long-term
financial security.

 

"We tend to think about debt
far too simplistically. Witness the movement in this country from the notion
that borrowing is a good growth strategy to the conviction that all debt is bad,"
says Blayney. "Consumers need to take a more sophisticated approach to
debt, one that allows for investment while maintaining a reasonable amount of
risk that won't jeopardize a family's financial well-being. Smart debt
management can help Americans as they seek to rebuild their net worth,"
says Blayney.

 

Creating a debt management plan is
one of the 12 steps in CFP Board's year-long "12 for '12 Approach to
Financial Confidence." Blayney recommends consumers consider five key
points when deciding to take on debt:


The duration of assets and liabilities:
     Consumers should be hesitant to take out short-term loans to finance
     long-term assets. For example, financing a long-term asset such as a home
     with short-term loans from credit cards is an ill-advised decision. When
     payment comes due at the end of the month for your credit card, you won't
     be able to use the value from your home to pay the bill. By the same
     token, borrowing long-term for a short-term asset can spell trouble as
     well. Taking a 10-year loan for a used car that won't make it until next
     year leaves you with debt years after the car you purchased is already in
     the junkyard.



Source: Certified Financial Planner Board of Standards, Inc.

 

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