Good debt vs bad debt – the difference?

Very few of us earn enough money to buy life’s important assets such as a home, car or university education with cash savings. Even if you could live debt-free, it might not be the savviest financial choice to dig into your life savings, leaving no financial backstop in an emergency, or cash to invest for retirement.

Not all debt is necessarily bad. It comes down to whether or not the debt incurred is good or bad debt.

Good debt is used to generate long-term value that gives you an asset at the end of your loan term and increases your net worth … it has some investment value.

Think of a bond to buy a home – with low interest rates and if you bought wisely, your property value should grow, so that at the end of the loan, you have a tangible asset with a monetary value that outpaced what you originally paid for it, including the loan interest.

A student loan is another example – getting a tertiary education is likely to secure you a higher future income as a skilled individual. If you’re able to work part-time while studying, pay off as much as you can afford on your student loan each month.

A car is an asset that most people cannot afford to buy without vehicle finance. Although it’s a depreciating asset and the interest rates on the loan are typically higher, it’s essential for most people to get to work and transport their families.

It’s best to pay extra every month over and above your instalment to reduce your outstanding balance as quickly as possible and save on high interest-bearing monthly payments.

Bad debt typically has high interest rates, is usually incurred to fulfil a want, rather than a real need and doesn’t leave you in a better financial position.

Good or bad, too much debt of any kind can leave you trapped in a financial crisis. If you’re considering taking on any type of debt, do a thorough financial assessment and ensure you can afford the repayments and the costs of credit finance.

Pay special attention to the loan terms, any special conditions, the interest rate and the cost of credit life insurance which is generally a mandatory condition.

Ensure that as much of your instalment as possible goes towards paying off your loan amount, rather than overpriced credit life insurance.

Try to understand the financial implications of debt. Ask yourself whether incurring the debt will improve your financial future. If it won’t, you’re better off without it.

Nkazi Sokhulu is chief executive and co-founder of Yalu.

Moneyweb

Diversification for the sake of it is no longer enough – markets are more complex and volatility is rising. Neither is merely diversifying into another currency, says Natalie Phillips of Investec Asset Management SA. Investors must consider their situation holistically when deciding how to complement South African investments with offshore components.

South African investors have battled over the last few years, as the FTSE/JSE All Share Index effectively experienced a sideways correction. Offshore diversification is mainstream news, but identifying value currently isn’t easy.

Contrarian investors increasingly

Where to?

In the US, tax rates are decreasing and corporates are seen benefitting, but most of the good news is already priced in.

Vimal Chagan of Liberty says currently clients may want to consider