What a silly statement – I always plan my debt! Well that is not always true and here is why. In most cases, you have a mortgage, credit cards, loans for autos, boats and recreational vehicles, lines of credit and other types of debt but do you really plan how you are going to pay it off, what is the best interest rate for your situation and when that debt will be paid off so you are “financially free”? Not really.
Let’s look at debt in two different categories – preferred and non-preferred. Preferred debt is tax benefited, whereas non-preferred is being paid with “whole dollars”. Types of preferred debt might be your mortgage, a business debt or a home equity line of credit (less than $100,000). Types of non-preferred debt would be credit cards, personal vehicles (not used for business), etc.
NEWS BULLETIN – Credit card companies are charging higher interest for everyone and starting to charge annual fees for those who pay off their debt monthly. Credit card companies are raising your interest rate on your current debt to astronomical figures and just expect you to pay. A friend just announced on Facebook that even though he pays his credit card off each month and never been late, his creditor raised his rate to 23 percent. Can you imagine – 23 percent? What if he gets in a bind and has to use some of that available credit?
An interesting thing is the typical credit borrower will fight tooth and nail for 1/8th percent on their mortgage but do nothing when their credit card jumps to 23 percent. This is strange.
What I propose is that every borrower, no matter how much they owe or who they owe it to, look at their debt under a microscope. Take a balance sheet approach to your debt like you do with your assets. Look at preferred debt compared with their non-preferred and make adjustments. Take a look at that credit card(s) and seriously look at the interest rate you are being charged. Then take a look at current interest rates for mortgages and think about the fact that you could take that 23 percent rate, roll into your mortgage at, say 5% and then if you are in a 35% tax bracket you could be paying 3.25 percent because it is probably tax deductible.
People ask, what is mortgage planning – well it is planning your debt so that you pay the least amount for the debt that you must accumulate because of your lifestyle. Of course, you are always better with no debt, but life is life.
If you would like more information about these concepts, give me a call.
Dave Walden 925-426-8383 ext. 26.
