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When is debt good? Here's how to tell

9 June 2022
3 minute read
Couple holding key to new home

Mythbuster: Not all debt is bad! Quite the opposite – using debt wisely can be a great way to build wealth for you and your family. Of course, if you don’t use debt wisely, it can make you poor, very quickly. But when you know the difference between the two approaches, you’re ready to make debt one of your money friends!

Debt is good when you use it to…

Buy a property
A property is an asset that will become part of your generational wealth that you pass down to your family. Take good care of it, and it can increase in value over the years as well. You can also use a home loan to buy a property that you can rent out to earn an income – not a bad side hustle.

Buy an asset to start or grow your business
Need a new delivery vehicle for your courier business, or electronic equipment such as laptops, desktops, phones, or even industrial equipment such as a 3D printer, for your business? These items can be pricey, but as they will help your business generate an income, a loan will help you afford them so you can start earning now!

Buy a car
South Africa doesn’t have great public transport to get you where you need to go. It can be expensive and unreliable, and sometimes unsafe. If you need to get to work, especially at odd hours, a car may be a necessity. Using vehicle finance to buy a car will ultimately help you earn an income. You can also usually get a good deal on service and maintenance agreements built into the finance agreement, which means you shouldn’t have too many extra expenses (other than a rising petrol price).

But, buy only what you need. A reliable, reasonably priced new car or a certified second-hand car, won’t take up too much of your budget. A luxury, top-of-the-range model will sap your finances and only look good for a short time.

Pay for studies
Studying for degrees, diplomas and certificates improves your skills and knowledge, making you more employable and in line for a higher salary. You can even use your new skills to start a side hustle to earn a little extra, or your own small business! That’s a great use of debt to grow your wealth!

Debt is bad when you use it to …

Fund a lifestyle
This includes buying things you cannot afford to fit in with friends, colleagues and neighbours. Or just because you have the credit available! It is everything from a really expensive car and home to branded food and clothing items and holidays.

Remember: The basic rule you need to follow to grow your wealth is to spend less than you earn, also known as living within your means. If you cannot afford the brand name, don’t buy it on credit – buy a cheaper model - if it is a necessary item. Don’t buy any model if it isn’t necessary! And save up for holidays – they always cost more than you think!

Buy everyday items such as food, transport and clothing
Using debt to pay for these unfortunately usually means you are living beyond your means. If you use your credit card for purchases and don’t pay off the amount used each month, you are using debt for day to day living expenses. Try and pay this debt down as quickly as possible, relook your budget so you can pay for these items in cash, and look for savings in the shops and online wherever you can!

Make sure debt doesn’t make you poor!

Start thinking of debt as a way to manage your money and grow your wealth, rather than as a means for buying things you can’t afford. You’ll soon make good debt your friend – and your budget and bank balance will be a lot healthier!

Four top tips for using debt well

  1. Know how much interest you are paying and how increases in the interest rate affect repayments.
  2. Have a plan to pay off the debt and write it down, such as Rxx each month.
  3. Be committed to paying back the debt. Tighten your belt elsewhere if necessary, until it’s paid off.
  4. Pay the amount due when it is due, and more if you can.

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