Broker Check

Keys to Financial Happiness #8

June 15, 2016

Avoid taking on too much, or the wrong type of debt.

Some studies have shown that reducing debt while saving can actually increase happiness. Therefore, an import-ant key to financial happiness is to engage in a regular savings program and attempt to avoid taking on high levels of debt.

Where debt is unavoidable, it is important to take on “good debt” rather than “bad debt.” An example of good debt is a mortgage that is used to purchase a primary residence or invest-ment property or an auto loan that is used to purchase a car to get to work. These types of debt allow the debtholder to offset expenses, such as rent, or to earn income.

Bad debt comes from pulling future consumption into the current period. This means making purchases on credit today rather than waiting to save up the money to pay for it. Examples include payday loans, credit card balances, and home equity lines of credit used for personal expenses.

Therefore, to increase your financial happiness you should pay down bad debt, increase your savings, and avoid borrowing to finance purchases that do not offset other expenses or add to your income.