When is DEBT good?
MANY forms of credit are largely blamed for throwing people into debt sinkholes. Money-related decisions are part of people’s lives. Food must be put on the table. Water and lights, education, risk cover, entertainment and many other things must be paid for.
Sadly, we tend to learn quite late in life that we should have had taken sound financial decisions in our first year of work. What do you do with your pay cheque in the first year of employment? It depends. You may prioritise to sort out family financial backlogs or choose to attend to your individual lifestyle needs. These are critical decisions that determine what you do between income and expenditure. Either way, one ends with some form of a debt. But when is debt good? Buying a house is a good way of using debt to finance your investment. Banks provide mortgage loans. Some employers provide a subsidy towards your bond. This is a real incentive for young employees to consider while their credit records are still very clean. The other positive thing is that bonds attract other risk-cover products. For instance, life cover can be taken as bond cover.
The point here is that one is introduced to and offered an investment product well as risk cover early enough in life when financial products, as in premiums, are still very affordable.
This takes us to the second form of credit — the credit card. We all know that this form of credit can have disastrous consequences if not managed appropriately. Credit cards should be reserves for serious emergencies. A credit card should be your last line of defence. There is a very big difference between a credit card and a mortgage bond. In both cases, you use money that is not your own. However, the bond allows you to use somebody’s money to build your investment. The credit card does not do that. Depending on what you take first, you can use the credit card to build a good credit record. You can do this by repaying every cent you owe each time you receive your salary. In some cases, it could be cheaper to buy household items like appliances and furniture with a credit card. This requires serious calculations and good cash-flow forecasting to avoid depleting your disposable income. This is way of saving your purse or wallet from being burdened by myriad store cards.
Another form of credit is car finance. It is heavily debated whether it is a good debt or not. Remember that property and buildings can appreciate in value, while cars depreciate. All debts should be based on affordability to make repayments on time and in full. Car repayments are even more serious. You should honestly ask yourself whether you really need a car or whether a car is one of those gadgets to prove that you belong to a certain lifestyle crowd. Remember, a car will eat your disposable income if you cannot recover some of the running costs from your employer or private work.
Business finance would be another good debt. As with a mortgage bond, you will be using debt to build your investment. There are politics and debates about business finance. Using finance for start-ups can be deadly when the business fails to break even as projected. You will need to make repayments from other sources. This can be very stressful. Business finance appears to be very useful for expansions of a proven and successful business. Unfortunately, emerging and small businesses struggle to get finance when they really need it.
Lastly, there is an education loan to finance your studies while in a job. Once again, your level of debt and your disposable income should be your measure for deciding this. On receiving that certificate or qualification, your salary prospects should improve and your job opportunities should widen.
I am not a financial adviser, but my own financial nightmares have taught me good personal money-management lessons. It is not advisable to take credit products from multiple providers in one go. Schedule and spread them nicely. Many people would buy furniture, appliances and even a car when moving into their first house. This depletes disposable income and attracts frustrations for financing everyday expenses.
Start financial planning early in life. The first year of employment is ideal for this. Retirement annuities and other investment products are critical when you are young, as they are cheap and very affordable when you are young.
Lastly, develop a multi-year personal lifestyle plan and use a realistic budget based on the income that you have. • Nqe Dlamini is a rural development consultant and chairperson of the national board of the SA Red Cross.
Mike Spain (right), the outgoing president, hands the chain of office of the Drakensberg Insurance Institute to Dale Cavell-Clarke, president for the forthcoming year. Susan Joynson was elected deputy president. The Drakensburg Insurance Institute was...