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What Are the Best Tips for Deficit Financing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 November 2016
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The controversy surrounding deficit financing is one that attracts attention from many economists. For some, financing of deficit spending is something that is seen as a necessity in today’s world, even as it is acknowledged that the spending must always be done for a good reason. Others would like to eliminate spending more than the amount of income coming in altogether, noting that while it is hard, there are households, businesses, and even governments that manage to do so. When deficit financing is necessary, there are a couple of tips to keep in mind that will help qualify the spending before it occurs and also help to ensure that the deficit is retired as soon as possible.

The general concept of deficit financing is applied to governments that spend money on services before that money is actually in hand. The same concept can be applied to households which create debt in order to buy items that the monthly revenue stream cannot manage to settle in full at the time, such as the cost for a home or a car. In both scenarios, there is a need to secure financing that does fit well with the projected future income and will allow for retiring the accumulated debt in a reasonable manner.

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One of the first tips of debt financing is to obtain the most agreeable terms and conditions from the lender. In the case of household debt financing used to buy a car or a house, this means finding a lender who will provide the best possible rates of interest while also offering a repayment schedule that is well within the limitations of the projected monthly household income. Doing so means that repaying the deficit financing within terms will be easier to accomplish, and if the household begins to generate higher levels of monthly income over time, some of that surplus may be used to retire the debt early. With proper planning, the household can even manage to make the payments on time if there is some amount of reduction in income at some point.

Along with creating a workable arrangement with a lender, deficit refinancing also calls for making informed projections of future income. For example, a government will look closely at the amount of taxes that will be collected over the duration of the debt created to cover the deficit spending and determine what percentage of those taxes can be diverted to retire the debt each tax period. In like manner, a household will base the repayment of a mortgage or car loan based on reasonable expectations of income generate by a job. Typically, it is a good idea to be somewhat conservative in these calculations, allowing some room for changes in the economy that could reduce income streams to some extent. By doing so, the chances of being able to retire the deficit financing on time and avoid late fees and penalties are still good.

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