Credit - Article 7.

HOW TO BE A SMART DEBTOR

In our recent discussions related to the topic of credit, I have indicated a belief that it is useful for us middle-class Americans to use credit - in certain discrete circumstances - for any one of a number of good reasons, for instance:

	In order to obtain an education
	In order to purchase or improve a home
	In order to establish or expand a business

My reasoning is, I think, pretty straightforward:

	Each of these uses of credit is tax-advantaged - meaning that the interest paid is tax deductible, effectively reducing the "cost" of the credit by approximately one-third
	Each of these uses of credit is likely to increase your net worth and, thus, your chance at financial independence

However, each of us knows of somebody who lost it all, who suffered financial ruin at least partially because of their misuse of or miscalculations concerning credit. Financial ruin, by definition, means that we are unable to pay debts. To be sure, some go bankrupt for entirely unpredictable reasons - but there are many things we can do to minimize the risk of financial ruin.

BE A SAVER

Even while you are paying off the several types of debt discussed below, it is vital to be saving money in retirement accounts AND as emergency savings. If you put off saving until you are debt-free, you will never develop the discipline of saving, and if you put even a minimal amount of money into savings regularly, you will better be able to handle the next crisis without losing ground.

EDUCATION LOANS

School loans not only served to help you increase your lifetime earning potential, but also the interest you pay on those loans lowers your taxable income, thus lowering your tax bill. Add to this some of the other favorable factors - like the fact that education loans are generally inexpensive and can be paid over an extended period of time - and you can see why I usually recommend that my clients NOT pay off student loans early. One other thing - these loans may be consolidated at more favorable terms than you now enjoy - try this website = www.loanconsolidation.ed.gov

HOME MORTGAGE DEBT

Until you have achieved financial independence (and even sometimes afterwards), you should maintain home mortgage debt of 50% to 80% of the market value of your residence. This is a cornerstone of sound financial planning and retirement funding. The increase in the value of your home is likely to provide better investment returns, taking into account all aspects of measuring returns, than use of the stock market, for you do not pay income tax on that appreciation and the mortgage interest and property taxes are deductible, resulting in tax savings every year of home ownership. I would even go so far as to suggest that you carry a mortgage on your home even if you can pay it off, as this can act as a hedge against inflation, and the wise use of leverage can get you into a better house than you might otherwise be able to afford. When interest rates decline, as they did over the last several years, you are able to refinance at lower and better interest rates at relatively low cost.

I urge my clients NOT to pay off their home mortgage early, and to instead take the money they are itching to put into the mortgage and put it into stock market investments instead.

CREDIT CARDS

This is easy:

If we are wise debtors, our material lives CAN be quite nice indeed. If we only carry "good" debt, then we can use that debt to help us achieve financial independence.

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