Debt comes in many shapes and sizes, ranging from a 30-year mortgage to your credit card. It's a way of spreading out the payments over a period of time for those purchases you don't have the cash for. Not many couples have a spare $250,000 lying around to buy a house. For too many people, savings is what's left over after they've paid all their bills. Paying down debt and increasing savings is the path to a solid retirement.
A secured loan is backed, or collateralized, by the asset you've purchased. Mortgages are secured against the house. Your car loan is collateralized against the car. Other secured loans might include those used to purchase a computer system, furniture, or jewelry such as your wedding and engagement rings. If you don't make the payments as you promised in the loan document, the lender usually exercises its right to take back the asset. The term of a secured loan varies, from up to six years for a car loan to up to 30 years for a mortgage.
It's difficult to save if too much of your income is going toward secured -- or unsecured -- debt. Having no savings means having no retirement plan.
Credit cards are one form of unsecured debt. You make purchases with the card. The retailer bills the bank that issued you the card. The bank then adds the total of the purchase to the amount you owe it. The bank pays the retailer, so the retailer won't take back the merchandise even if you don't make the payments.
Interest rates on credit card debt averaged about 14.9 percent in mid-2012. Rates can range up to 30 percent. Credit cards can be an expensive way to purchase items: If you make only the minimum payment each month, $15,000 worth of credit card debt will take up to 31 years to pay off at 15 percent interest, paying $343 per month.
Savings is the money you have in the bank, not what you saved on that pair of designer shoes you bought. After you've accumulated from three to six month's living expenses as an emergency fund, it's time to think about developing an investment portfolio. Years from now when you're older, the investment portfolio will switch from a more risky growth strategy to a less risky income-producing retirement portfolio.
Thinking about retirement now seems way too soon. After all, you have several decades to build up a retirement fund, so why start now? Because the longer you save, the less you need to save, and the bigger the fund you'll end up with. That means less scrimping now and more of a nest egg later.
For example, if you save $100 each month for the next 40 years you'll have socked away $48,000. But that's not the best part. The $100 will be earning interest. After 40 years at 6.5 percent interest your $48,000 would be $241,000. The 6.5 percent interest is assuming a balanced portfolio, not just a savings account.
If you put off saving for 20 years, you'd have to save nearly $500 a month to reach that same total.
- Photos.com/PhotoObjects.net/Getty Images
- What Does Someone's Net Worth Mean?
- Should I Save My Money or Pay Off Debt?
- Comparison of Installment Loans & Conventional Mortgages
- Is it a Good Idea to Consolidate Debt in a Mortgage Refinance?
- Long-Term Bank Loans: Advantages & Disadvantages
- Can You Actually Save a Lot of Money by Using a Piggy Bank?
- Typical Percentages for Household Budgets
- The Average Time to Pay Off $9,500 in Credit Card Debt