Debt you need vs Debt you want

03 January 2022 ,  Gerda Janse van Rensburg 202

Depending on your background and upbringing the mere thought of having debt is a very scary one for some people.  Some of us were brought up with the principle that owing money to someone is against your values, and thus never learned how to handle credit correctly. 

The flip-side of this coin is unfortunately also true.  Some were taught that it is good to have debt and unfortunately were never taught where that fine line of too much debt was.

Enter the all too unpopular BUDGET, that children are taught at school, without giving them the importance of the tool.

We find often that clients are ready to purchase the big items in their lives, (house, car) and then do not have enough of a credit record to qualify for a loan, or have so much personal loans that they are deemed to be over-committed and cant afford a bond on a property.

In an article on, CNN Money the concept of good vs bad debt is explained as follows:

“Good debt includes anything you need but can't afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.  Example:  Home Loan, Car finance

“Bad debt includes debt you've taken on for things you don't need and can’t afford (that trip to Italy that you have to have, because the Jones’s went last summer). The worst form of debt is credit-card and personal loan debt, as it usually carries the highest interest rates.”

The article continues as follows: “avoiding debt at any cost is not smart either if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely manage the money you do borrow.”

The reality is that we have become accustomed to a world where everything is quick and fast and I get what I want, and I get it now.  When talking about finances, this is however not the way to go, and we all need to learn how to manage our finances correctly.  Build up that credit record and buy what you need and not what you want.