Credit seems to be a great solution to get you out of debt but it can be a vicious cycle and difficult to manage. Once one is in debt, unless it is properly managed, it can often get worse and getting out of debt can be a difficult task.
There is good and bad debt. Good debt is when we use credit to buy an asset that increases in value, such as a house. A house increases annually in value and often property is too expensive for us to buy without taking out a bond. By the time we sell the asset, it has grown at a rate faster than inflation and we have made a profit. If we use credit to buy a depreciating asset such as clothing, electronics or appliances, we have accrued bad debt. The asset we have bought has less or no value once we have used it and after we have paid the interest on the loan, we have made a loss. Bad debt comes in the form of clothing accounts, credit cards and short term loans.
How does one prevent going into bad debt? Drawing up a budget and revisiting it regularly to make sure it is a true reflection of our expenses and practising delayed gratification. We live in a consumer driven society, and we are enticed to buy the latest gadgets and commodities. No longer do we use the lay-buy system but rather the “buy now pay later” system. By waiting till we can afford the purchase, we will not only be debt free but also enjoy guilt-free shopping.
So what is a healthy budget? After paying all our expenses, to have money left at the end of month. Living at about 80% of our net income; having a little wiggle room in our budget. I encourage you to draw up an honest budget and cut expenses if need be. Don’t use bad debt but rather save using compound interest in your favour.
Debt – good or bad?
