Living with debt is something that everyone tries to avoid. However, it can be extremely difficult when you are trying to balance a growing family and running a small business. The key is to not let it bring you down. Instead, learn how to use debt to your advantage. As such, here are some tips on how to use debt to your advantage.
Tip 1 – Keep it in Perspective
There are times when taking on debt is inevitable; examples of this include buying a house or even a car. While it is noble to save up to pay for everything in cash, the realities of modern life probably mean that you are using credit to make life easier.
While easier can be a good thing, don’t fall into the trap of needing to work just to pay off your debt. Instead, you want to keep debt in perspective by following the 28/36 rule. That is no more than 28% of your pretax household income should go to paying off home debt including mortgage payments, property tax, and insurance. At the same time, you want to make sure that no more than 36% of your pretax household income is allocated for all debt payments – personal loans, car loans, credit cards, etc.
This might sound simple enough, but it can be difficult to achieve as it means there are times when you need to say no to that expensive vacation or that new toy. Just remember the world won’t end if you don’t take that three-week tour of Europe. In fact, providing your family with fiscal stability is probably best thing you can do.
Tip 2 – A Little Debt Can Help You Build Credit
This might sound counterintuitive but banks and finance companies are looking for people who are willing to take on debt. The key here is knowing how the manage the debt you are using. Make sure you pay off your credit card balances every month and never pay late. In fact, it is better to pay the minimum than to pay off the entire balance a day late.
If you follow these rules you will find that your credit score will increase and in turn, you will have access to more money when you need it. As such, credit is very much a use it or lose it proposition. Just remember, if you dance with fire you can get burned. So, always be mindful when you are using debt.
Tip 3 – Set up Separate Credit Lines for Your Business
Don’t mix your personal and business credit lines! This point is so important that it needs repeating. Using your personal credit lines for your business can destroy your credit score – even if you can pay off everything when the bill comes.
The reason for this is that businesses tend to be heavy users of business. To the point where they might even use up their entire available credit lines every month. You might be thinking it’s not a big deal as you can pay off the balance. But banks and credit card companies will see this as a sign that you are living off your credit cards and this will hurt your credit score.
If your business relies on credit, then the best option is to set up a credit line and use that. If you are not sure how to do this, then you might want to reach out a lender who specializes in small business finance. One of the companies I found during my research was Mulligan Funding who has provided funding to more than 50,000 small businesses across the country.
Tip 4 – Have a Plan
Just because there are times when taking on debt is inevitable doesn’t mean that you should have a plan. This should include how much are you able to pay each month, remember Tip 1, and how long it will take to repay the loan. Doing so will ensure that you won’t end up underwater. It will also help you set a positive example to your kids on how to be financially responsible.
Remember using debt to your advantage requires constant vigilance but the payoff is that it will also make it easier for you to manage your family’s and your business’ finances. Just keep it all in perspective and you’ll do fine.
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