Managing the Debt Side of Your Balance Sheet

The list of assets and liabilities for an individual, family or company is referred to as a balance sheet.  And that word, “balance” is key.  We so often concentrate on asset building activities and we neglect the management of our liabilities.  That has certainly proved itself to be true nationally as many Americans have found themselves over-extended with debt.  Let us focus on managing our debts as strongly as we do our assets.

We teach in our financial education courses that there are two kinds of debt: good and bad.  Good debt is created to help us acquire and build assets.  Examples include buying a home instead of renting or financing the start a business.  It also can include financing an automobile as a means of transportation to employment or to gain additional education.  Bad debt, by contrast, impedes the acquisition of assets by draining off income toward debt that serves no productive purpose.  Charge card debt for consumer non-durables (think exotic vacation that you can’t afford) is financed with high interest rates and is not deductible on your federal tax return.  By contrast, mortgage debt interest may be deductible and can lead to asset value growth over time.

For example, a $10,000 charge card balance financed at 18% interest over five years may cost you about $5,400 in interest.  If, instead, you took $5,400 and invested it at, say, 7%, you would have about $7500 in additional earnings.  So, the charge card-financed vacation that cost you $10,000 to take also cost you a total of about $12,900 in interest and opportunity lost.  I hope that you at least ate well on your $23,000, one week vacation!

Today’s events provide a perfect opportunity to scrutinize your debts and, if appropriate, organize them so that you are paying them down. Ideally, arrange your debt structure so that the government may help you by making the interest tax deductible.  By today’s events, we mean the move toward greater sanity in debt and cash flow management coupled with historically low interest rates.

Call your financial advisor here now to discuss how this type of financial check-up might save and gain you many more assets as you move toward your life’s goals.  If you are not now a Fragasso Financial Advisors client, call us at 412-227-3200 or 1-800-900-4492 to begin that discussion.

And, let us also consider those who are less fortunate and devastated by the current economic downturn.  Click here to view the attachment describing the United Way of Allegheny County’s Neighbor Aid initiative.  As we properly structure our own debt picture, we may find a few dollars to help our neighbors.

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