When is DEBT good?

Weekend Witness - - Opinion - NQE DLAMINI

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...

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