One of the earliest lessons that most of us learn in life is that debt is bad, and we should do everything in our power to avoid it.
This is ultimately true, but there comes a time in every person’s life when debt is not only unavoidable but also necessary and, believe it or not, beneficial.
However, this is only true in very specific circumstances and understanding the difference between good and bad debt is the only way to stay out of financial trouble.
Understanding Debt in South Africa - What is Debt?
The general rule with spending money is that you should only spend what you can afford to spend, on things that you really need. And, if you cannot afford to buy what you really need right now, take a few months to save up for it, rather than taking out unnecessary credit.
Although there are many different types of bad debt in South Africa, there are two which are possibly the most common as well as the worst kind of debt you can have:
Although it feels great to buy nice things without paying for them on the spot, it’s guaranteed that you will end up paying more for those items in the long run.
Store account repayments most often come with hefty interest rates, which increase substantially if you don’t stay up to date with your payments.
Furthermore, should you fall behind on your payments, you can be sure that the credit provider will not think twice about staining your credit history by recording you as someone who doesn’t pay their debt as per the agreement.
Instead of buying piles of new clothes that you don’t need, buy second hand, or even consider clothing swaps between you and some of your friends. Doing this is not only good for your wallet but also for the environment.
Store cards are used as a form of loyalty. Once you have been trapped in the cycle of debt, buying food and clothing on credit, the only winner is the store, who has now just ensured you will be coming back week after week, month after month. Over and above this, they have just made another 18 to 27% margin on the items you have bought, pushing up their profit margins substantially, while you try keep up with your monthly payments.
Having a credit card can be useful if you are, by nature, responsible with your money. However, if you are prone to impulsive spending, then you should probably avoid getting one.
Much like store accounts, if you don’t stay up to date with your credit card payments, it becomes increasingly harder to catch up as the interest rate on late payments grow.
When we think about good debt, we think about some kind of investment. Investments are things that you spend money on now to benefit your future.
A good example of an investment is buying a home. Generally speaking, buying a home is considered a good financial move as it comes with the potential to generate an income if you need it to, and the interest rates on repayments are comparatively low.
Furthermore, the housing market often improves over time, and you may be able to sell your house at a later stage and earn a decent profit.
Student loans can also be considered “good debt” as it is an investment in yourself and your future. Education is often the key to higher earning potential and more job opportunities which pave the way to a stable financial future.
Understanding the difference between good and bad debt can play a fundamental role in helping you build wealth for your future.
Our financial advisors in Johannesburg can help you make smart financial choices, develop a personalized financial plan for your unique needs, and help you steer clear from debt.
We offer a wide range of financial services all geared to helping you reach all your goals while still enjoying the moment.
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