In last weeks radio interview discussing why people get into debt, I was asked about good debt. What is good debt and is it okay to have it? It’s a question I often get asked and hence I decided to write this post.
There is often talk about this “good debt” and “bad debt” concept and that one can have “good debt”. It is possible I guess, but only under some very specific circumstances. In general, debt is debt and all debt is bad as it needs to get paid off at some point. Whether you’re the one paying it off or whether it becomes a burden for your estate, there’s no such thing as good debt!
Let’s have a look at some of the different types of debt that one can get. I probably haven’t used the financially correct terms but it makes sense to me so I hope it makes sense to you too!
Essential Debt – or what people generally refer to as good debt
Essential debt is really just that, it’s debt that you need in order to survive. People’s views on what’s essential and what is nice-to-have differ greatly and there is much room for discussion. Here are some of the common items considered “essential” or “good”.
A home loan
Very few people have the cash available to purchase a property straight up, so a home loan is generally required. It’s understandable to have a home loan but it should be one that you can afford and one that you can hopefully pay off sooner than required. Don’t forget about all the fees involved in purchasing the house as well as the general maintenance costs of owning a house. Just for interest, have a look at how it is possible to sell your house at a loss.
Car finance – sometimes
Car finance may be considered essential if you really need a car in order to get to work and back. But, a modest and practical car may be essential whereas the nice flashy car with all the fancy gadgets is certainly not essential!
Study loan
A study loan could also be an essential debt, but it really is not a good debt! It often takes years to pay off and can be quite a strain on your finances. There is some debate about whether having a degree is any guarantee to a better job (or any job for that matter). I am in no position to comment on that, but study loans can be quite a burden. I know, I had one.
Other reasons
If you are in absolute dire straits then groceries and living expenses could be considered essential debt. If you’re in this situation then you are really in deep trouble. I’d suggest that you consult a debt counsellor and / or financial advisor immediately!
I can’t think of any other essential debt (or good debt) but perhaps you can comment below if you feel I’ve left something out.
The point to take from this is that one does sometimes need to take out a loan in order to make a large purchase, but it really is not good debt and it really is not good to be in any sort of debt. If you do need a home loan or car finance, be sure that you can afford more than just the bare minimum. If you lost your job or something terrible happened in your family life you could easily lose your home.
Debt is a stressful noose around your neck! Even the so-called good debt.
Bad Debt – or consumerism debt
All other debt that you have (besides investments detailed next) is bad debt! Most of it (if not all of it) is likely from consumerism and general keeping up with the Jones’ kind of spending. Credit cards, store cards, short-term loans and payday loans are all terrible forms of debt. They incur high interest rates and are designed to make other people very rich off your hard-earned money!
We live in a society which pressures us to have certain things, go certain places and hang with the “right crowd”. It’s all quite silly if you stand back and look at the situation, but when you’re in it it’s hard to reflect.
Help! Where’s my money gone? Use the workbook to list and track all your debt and you may be surprised at how much you have. The key point to reflect on now is whether you really need everything that you have stuffed in cupboards or in the garage. Have you wasted money on unnecessary things and worse off, did you incur debt for things you don’t need?
Investment Debt (buy-to-let property)
It is possible to use debt in a way to make money. This is often done through property investments in a buy-to-let property. It’s the only option, but it’s the most relevant example that I can think of. I’m not going to write much about this other than to say that this type of debt could be considered good, but it can also be a little risky if you do not know what you’re doing. While on the topic have a look at the 6 myths related to buying to let.
If you plan on purchasing an investment property I would really recommend that you buy 2 – 3 books and attend at least one course or seminar on the subject. If you’re willing to spend R1 million or more on an investment, then surely a few hundred rand upfront in the form of self-development & education is worth it! Considering how much money you’ll pay across to attorneys during the registration process then it should be easy to justify a few hundred rand to improve your knowledge and help you make better decisions! And you may even save money by applying what you learn.
Investing in yourself is one of the best forms of investment!
So do you get good debt?
Don’t become complacent with debt and think that it’s okay to have good debt. You may be covered with life insurance and you may have a plan to pay your home loan off early, but when things go wrong in life (which they do) then having debt will only exacerbate the situation!
Debt is bad and prevents you from experiencing financial freedom!
Thanks Brendan for another GREAT article. It’s been fun reading your posts daily during lockdown. You have a solid financial foundation and very good insight into personal finance. Exactly what a lot of South Africans need right now.
I’m glad to hear i’m not the only “weird” person that thinks there is no such thing as good debt. ALL debt is bad in my view.
It became so “normal” to have debt (car loans, home loans, student loans, credit cards, ect) that if you don’t have any debt, then you are considered “weird” or “abnormal”.
This problem of people living paycheck-to-paycheck, overindebted in big houses and luxury cars they can’t afford with minimal to no savings in their emergency fund has been around for a very very long time. COVID-19 only EXPOSED the problem.
Warren Buffet once said: “When the tide goes out you can see who is skinny dipping”.
This is exactly what is happening right now.
The only way one could prepare for a crisis like COVID-19 or any other crisis in the future is to live a debt free life (including that car loan and home loan), keep expenses low and have an emergency fund of atleast 6 months of expenses in a savings account.
Thanks again for all the daily emails.
Hope your teachings will reach a lot of South Africans that they can learn from their mistakes and see this as a never again moment. Never again will they be in debt. Never again will they be without an emergency fund. The question is, will people?
Hi Wouter, thanks so much for this awesome feedback. Really appreciate it!
Your comments regarding debt are spot on. Hoping that my blog can inspire people to believe that they can pay off their debt and indeed live a debt free life!