A few weeks back I shared some of the financial mistakes I made in my twenties in a bid to help those of you still there to learn from me. The post was really well received so I thought I’d follow up with another post about finances… well, with a difference!
The Benefits of Debt
But what on earth could be beneficial about debt you ask? Well, yes I hear you. For most of my adult life I’ve also thought this way. Which is ultimately a GOOD THING. We all know debt is a really bad way to manage your financial life. Except sometimes there are benefits to debt, obviously it’s better to spend the money we have right now instea of having to pay a month later with added interest. It certainly makes sense to live a debt-free life, right?
But there is such a thing as “good debt”! For example debt that improves your life and ultimately benefits you and your financial situation.
However when you’re dealing with debt it’s worth remembering that even the “good debt” can easily become bad debts if you don’t handle them with care. To illustrate this point, here are some examples of good debt, and how to avoid turning them into bad which 1Life has put together along with a few lessons I’ve learnt on the subject…
1. Buying property with the aid of a bond
Saving up the money to buy a home will take you a long time, and you’ll most likely need a place to live sooner than getting enough physical money. While the financial commitment of a bond is long and expensive, it serves the purpose of getting you a foothold on the property ladder.
You would probably also incur other expenses if you held out on buying a house – including rent – which would minimize your saving potential each month. All of the above reasons push bonds into the category of good debt, even though they will still cost you interest and fees.
We were fortunate enough to get a foot up onto the bottom rung of the property ladder fairly early in our married life with the help of some family funding and a bond from the bank which meant that we were lucky enough to buy before the boom of 2004/5. Friends at the same stage who didn’t buy at the same time have struggled ever since to afford to get into the property market… the prices of properties in areas that appealed to them just keep going up and up… such is the way of the real estate world. Without taking the risk to apply for a bond and starting to pay it back month after month for YEARS we would never be where we are now. In this case debt has been essential and ultimately we’ve made much more money than we borrowed from the bank due to the fact that property prices have increased. Ultimately, when it comes to buying property, do it sooner rather than later. And embrace “good debt” for how it allows you to do this.
2. A loan that allows you to save money
There are some purchases that cost money right now, but which will ultimately allow you to save money at a later stage. For instance, if you borrow money to install household items or to maintain your property, you would realise a return on your investment in a couple of years, and then a reduction in household costs for the future.
At the moment we are considering renovating our house. We’ve lived in it without doing any improvements for over 13 years and the bathroom and kitchen are starting to look very tired. We also realise that should we ever wish to sell we would make much more of a return financially if we did some renovations. To make our home more appealing to potential buyers we need to open plan the living area, create an en-suite bathroom and add another living room for the kids to hang out in, plus an entertainment area wouldn’t hurt! After contemplating this for months, going to show houses, having our place valued, basically going round and round in circles, it’s really time to head to the bank and find out just how much “good debt” they’d be prepared to offer us to do this…. and ultimately make more money at the end of the day when we do eventually sell (although that will be much harder to do once I have a revamped house!)
3. Study and improve your professional status
Taking up an important course that requires money you currently don’t have can be stressful, but in such instances, good debt is definitely required. If you’re confident of the career path you’re taking, then you will cover the debt with no issues.
Be sure to do your research so that you know that the debt you’re incurring now will deliver a return on increased earnings or job opportunities when you’ve completed your studies.
As I mentioned in my previous finance post, this is one of the biggest regrets of my life… I know if I wanted to I could probably change this and go back to study something, but that will be so much harder to do now that I have a job, kids, husband, blog etc etc. What would have been far easier would have been to have taken out a student loan at the time when all my peers were doing just that! I was risk averse and all I had been taught was how BAD debt was so it didn’t occur to me that in this case it was actually “good debt”. I wish someone had told me that sooner!
The bottom line about debt
You should never buy necessities like groceries or wants like clothes. Nor should you cover things like rent or buy things that you should be saving for with credit (Hello overseas holiday??)
Only if you’re truly confident that you have realistically considered all the possible outcomes, and you can pay ALL your debt back, is it safe to call it “good debt”.
This post is sponsored by 1Life Insurance to educate on you on common South African financial strategies. Visit them to get reliable information on life insurance online and get a quote for Life Cover online