debt - burden or benefit

There aren’t too many people today without some debt. The thing about a debt is that it can be a benefit or a burden. What is it for you?

From my experience most people don’t understand how to manage debts so for them it becomes a “burden”.

When is a debt a burden?

When it is used for purchases that don’t generate income or it does not suit your personal circumstances such as expensive cars, trips overseas or shopping sprees. These expenses do bring much joy in the short term BUT in the long term, if you don’t pay it off fairly quickly, this debt can become a burden. A debt that becomes a burden can have disastrous effect on relationships, work and general everyday life.

I understand that events in life make it necessary for many to take on debts for education, medical treatment or on loss of employment and while some of this type of debt is a necessity, it’s important not to borrow too heavily.

Know what suits your needs, what you can afford to borrow and keep within a budget.

When is a debt a benefit?

When it is to purchase an investment property or shares. In this case you will benefit (hopefully) from any increase in the value of the investment, while potentially reducing the amount of any income tax to be paid along the way. You can also use the rental income or dividends to reduce the debt.

How do you make debt a benefit?

The first step is to prioritise your debts. Work out which is the most urgent debt that needs to be paid off, because not all debt is borrowed under the same conditions. Think about the fees, penalties, interest rate and the term of each debt.

Secondly, consolidate your debts. Simply put, combine your loans into one. It makes repayments more manageable and can reduce the amount of interest you have to pay. But you need to make sure that the interest on the new loan is less than that of the old loans and that you don’t use your credit card to take on additional debt.

If you have savings, it may help to pay off whatever debt you can. This may be practical if you’re paying more in loan interest than you’re earning through interest on your savings or share dividends.

And finally!

Dispose of all credit cards, except for one that has the lowest interest rate, because you may need a credit card in an emergency. And learn how to spend less – this always helps.

If you are in or may be falling into a serious debt situation, tackle the issue head on – ignoring debt won’t make it go away. Talk to me – I can help you get your finances