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Thursday, February 3, 2011

Good reasons for paying off your debts

Pay off debt
Paying off personal debt allows increases useable income
Paying off your debt is a good reason to free up income that might have otherwise been locked up in an expense budget. By paying off debt, your personal balance sheet moves into a lower risk category for new lenders, facilitates new income earning opportunities and can help build savings. There are many good reasons to pay off debt that can make a lot of financial sense.

Costs less

There are also good reasons to pay off your debts rather than pay down your debts although paying off your debt might first involve paying them down. Either way, a plan to pay off your debts rather than just keeping debt in checks costs you less. Interest accumulates on debt every billing cycle. The more of those cycles debt continues to exist, the greater the cost. For example, immediately paying $100 in debt that has an interest rate of 12 percent saves you a nominal annualized $12 in interest i.e. if the interest rate doesn't compound over a year. In reality, the interest rate would be higher.

Mental health

Another good reason to pay off your debt is psychological. Lower stress and the knowledge you owe less, little or nothing feels good. The benefits of feeling good can also compound just like interest does. Thus, paying off debt creates a feeling good account that compounds happiness or relief thoughts each month instead of interest. In other words, paying off debt can help build psychological health. Good mental health can prolong longevity, increase enthusiasm and allow new ways to enjoy life.

Financial safety

The affects of not paying off debt provide additional good reasons to pay your debt off. For example, not paying off debt can lead to lost financial opportunities, lower savings, and in bad cases, bankruptcy. Not paying off debt can also mean working more to pay off interest on debt, which in turn could delay a retirement plan or other financial plan. Simply put, financial safety helps keep finances well managed, and prevents debt from getting out of control.

Builds finances

When money is redirected in the right way it can build wealth. The chance to build wealth is a good reason to pay off debt because it increases net worth, can improve your credit profile and allow additional financial opportunities such as investment opportunities, and for creating an emergency account so debt doesn't have to be used when it might be needed. Proper financial asset management i.e. allocation of money into the right accounts and purposes can optimize the value and yield of money.

Financial discipline

Paying off debt consistently is also a good reason to build financial habits that work. The purpose of debt is to leverage profitable opportunity, or finance short term costs for practical reasons. If debt must be used for purposes other than this, and the pattern of spending continues, the negative aspects of debt can increase. Having good financial discipline is thus a good reason to pay off debt repeatedly as it is used because it reinforces a positive behavior and payment pattern.