Debt. The word alone is pretty scary… It conjures a tidal wave of bills that swamps you every month, draining your bank balance and preventing you from moving on with your life.
But did you know that in certain circumstances, debt can actually be a good thing?
The most obvious example is if you take a bank loan to buy a house. It’s good because the money is being used to purchase an asset that is likely to grow in value at a higher rate than the interest rate on the loan. In this case, debt is a necessary step towards long-term financial freedom.
Another example is a student loan. There are lots of people who avoid studying further because of the size of the loan they’ll have to take. But think about it this way: if you take out a loan and you’re studying towards a profession that will allow you to earn more one day, you’ll be able to pay it back relatively quickly when you start working. Like a house, student debt is an investment in your future.
What about a new car?
This is where debt gets tricky. Taking a loan to buy a snazzy new Merc is generally not the best kind of debt because a car depreciates in value the moment you start driving it. Unless it’s a rare collectible, it’s not doing anything to build your wealth. Of course, if you can afford the repayment without stretching yourself to breaking point each month, then go ahead. Who doesn’t love that new car smell?
The same goes for store cards. You need clothes on your back, sure, but when you’re swiping your card for a cute new pair of jeans, or the third watch in your collection, you’re creating bad debt with a high interest rate. Always pay off a store card or credit card in full every month, otherwise the debt will snowball and get very expensive.
Only if you can afford it
At the end of the day, you should only consider going into debt if you can afford to do so. Even “good” debt like a home loan can be crippling if you can’t manage the repayments each month.
Don’t listen to the salespeople trying to sign you up for new loans. Rather use a tool like 22seven to create a budget and see how much money you have at the end of each month after you’ve paid all your expenses. Then, and only then, can you start thinking ahead and maybe take a loan that will lead to long-term prosperity.