Have you ever wondered if debt can be a good thing or if it’s only bad? In this article, we delve into the subject of indebtedness.
From the time I was very young, debt had always been viewed as taboo. But debt is seemingly unavoidable as we reach our adult life. It’s how we pay for homes, cars, and sometimes smaller everyday items. For the vast majority of people, careful management of their debt is how they maintain their lifestyles and this is not necessarily a bad thing.
What is Debt?
Put simply, debt is one party borrowing money from another party with the intention of paying it back in monthly instalments. Typically, the money is paid back with interest, meaning you pay back more money than you borrowed. This interest rate varies depending on who you borrow the money from and the terms of your loan agreement.
The more money you borrow = the more interest you’ll pay back.
How Can Debt Be Good?
First off, debt is necessary. Taking out a cellphone contract, for example, is important in Western society. To do this you need a good credit history. In essence, credit history is a running history of all your debt and tracks how frequently and consistently you paid back your debt in the past. Paying the money back consistently every month increases your credit score. This means that taking out a larger loan in the future will be easier, because the lender (party lending the money) will feel more at ease as they have evidence to believe that you will pay the money back.
How to Get Good Debt
You first need to build up an initial credit history. The best way to do this is to open something like an Edgar’s or Woolworth’s account and buy an item of clothing on credit. Then pay back the money over a few months to increase your credit rating.
In the event that you cannot afford to pay for tertiary education, taking out a student loan can enable you to get a qualification that you would not otherwise be able to acquire. It’s also fairly easy to get a student loan without too much credit history if you have someone like a parent or guardian to sign surety (someone who will agree to pay for you if you can’t afford it).
Home loans are also an example of good debt. A house is, in general, an asset. This means that it will tend to increase in value and when you eventually sell the house, you will receive more money than you bought it for. Remember that taking out your own mortgage is a better idea than renting. When you rent, you are paying off somebody else’s asset instead of paying off your own asset.
When is Debt Bad?
Debt is bad when you borrow money to acquire unnecessary possessions or when trying to fund a lifestyle you do not have the money to maintain. Generally, this manifests in credit card payments. Oftentimes, interest rates charged on credit cards are far higher than other forms of debt, and payment schedules to pay off this debt are organized to maximize costs for the credit card owner. Whilst there are logical ways to avoid this, it comes down to putting aside your ego and buying cheaper goods that match your income. A credit card, if used wisely, can be a useful tool to pay bills and manage your finances.
Cars are another prime example of bad debt. Cars are undeniably important, but it is very easy to fall into the trap of buying a car that you can’t actually afford. Cars should merely be a form of reliable transport to get to and from work, learning institutions and other places. Choose your car wisely. Some have better resell value than others while also being more affordable to maintain. When choosing a car (when you really need one), speak to someone who is knowledgeable on cars to help you choose the best one.
Debt can generally be thought of as bad if it is not absolutely necessary or if it does not actively contribute to an investment. It is important to remember that debt is borrowing from your future income. You buy something in the present with the plan of paying for it in the future when you have the money.
At the end of the day, debt is a part of most people’s lives. It should not be taken lightly, nor should it necessarily be avoided at all costs. A careful analysis of the costs and benefits of getting into debt should be your go-to response when considering a loan or paying for something on credit. Weigh up the pros and cons of getting into debt, and arrive at a thought-through conclusion instead of acting on your impulses or spontaneous desires.
The best way to see what debt you can or can’t afford is through careful and precise budgeting. Being able to clearly see you income and expenses may show you that by adjusting your spending habits, you do not need to spend money on credit after all. Try downloading a budgeting app, which tracks where you spend your money. It may be a good idea to get some guidance on how to set up a student budget.