Chapter 5. Dealing with Debt

In This Chapter

  • Using your savings to lower your debt

  • Getting out of debt when you don't have savings

  • Understanding the pros and cons of filing bankruptcy

  • Halting your spending and staying out of debt

Accumulating bad debt (consumer debt) by buying things like new living room furniture or a new car that you really can't afford is like living on a diet of sugar and caffeine: a quick fix with little nutritional value. Borrowing on your credit card to afford an extravagantly expensive vacation is detrimental to your long-term financial health.

When debt is used for investing in your future, I call it good debt (see Chapter 2). Borrowing money to pay for an education, to buy real estate, or to invest in a small business is like eating fruits and vegetables for their vitamins. That's not to say that you can't get yourself into trouble when using good debt. Just as you can gorge yourself on too much "good food," you can absolutely develop financial indigestion from too much good debt.

In this chapter, I mainly help you battle the pervasive problem of consumer debt. Getting rid of your bad debts may be even more difficult than giving up the junk foods you love. But in the long run, you'll be glad you did; you'll be financially healthier and emotionally happier. And after you get rid of your high-cost consumer debts, make sure you practice the best way to avoid future credit problems: Don't borrow with bad debt.

Before you decide which debt reduction strategies make ...

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