Debt doesn’t have to be a dirty word


NOTICE: It’s funny when you talk about debt or hear about it in the news, you automatically seem to think it’s a bad thing.

Make no mistake, bad debt has caused a lot of financial stress for many families in New Zealand and needs to be regulated further. But sometimes debt can help you get ahead.

Before we focus on all the ways that debt can help you personally, it’s worth taking a break and considering the crucial role it has played in helping many countries over the past year. Since the arrival of Covid-19, many countries, including New Zealand, have used debt at breathtaking levels to help them and their citizens through such difficult times.

Without this debt, there would have been catastrophic results here and around the world. From a social good point of view, therefore, countries’ debt should be viewed as positive: provided that one day it is repaid, hopefully, while interest rates remain relatively low.

But what about you? Here are some of the types of good debt. The trick is to manage them well and make sure you stick to the golden rules.

Home is where the heart is

Let’s start with the most obvious: mortgages. It’s not the most attractive topic given the state of the housing market, but if you don’t want to rent your whole life, borrowing money from the bank to get into your first home isn’t a good idea. bad starting point.

Interest rates are the lowest I have ever seen and have been around for a long time (56 years, just to let you know). When I got my first mortgage, the interest was 18.5%, but the average price of a house was only about three times my salary. Now you can get a floating mortgage of around 3.4% and a fixed rate for one year as low as 1.99%.

The only problem is that the amount you are going to have to borrow will look like a king’s ransom, especially if you want to buy in one of the bigger cities.

In most cases, we have seen an increase in home values ​​over time, so while this is a massive commitment and you have to do your homework, use other people’s money. to develop your own asset is not a bad thing.

Credit cards can be a good tool if you pay them off within the interest-free period.

jessica shapiro / stuff

Credit cards can be a good tool if you pay them off within the interest-free period.

Be your own boss

Getting a business loan could be really good debt. This means that you can use that money not only to generate income, but in many cases to develop goodwill and a appreciating asset that could be worth much more in the years to come.

But don’t take my word for it. In February 2020, Statistics NZ stated that there are 557,680 companies in New Zealand and that this has been increasing exponentially since 2013. Of course there is a risk with any investment so do your homework first and talk to a business advisor or a bank would be a good first. walk. We all know a lot of startups fail in their first year, but if you can get through those tough first few years, using debt to grow your idea or business is pretty cool.

Escape High Interest Debt

The next type of debt that has value for your overall financial well-being is for those with a number of different, high-interest debts owed to a range of lenders. Consider bringing them all together and consolidating your bad debts into one loan, with a monthly or fortnightly payment amount that coincides with your pay or salary.

While the interest rate is higher than a mortgage, it should be much lower than the insane rates charged by credit cards and rental purchases, not to mention payday lenders and truck stores.

The trick with debt consolidation is that you don’t start using bad debt options again. Have a plan, stick to it, and look forward to the day when you are free to owe anyone anything. The feeling of satisfaction is incredible and will then allow you to create a buffer or emergency account so you don’t get caught up in this tide of bad debt.

If you need a degree, a student loan can be of great help.

Joe Johnson / stuff

If you need a degree, a student loan can be of great help.

Enjoy the benefits, but not the costs

Use debt free. Yes, there is such a thing. Most credit card companies hate me because I use their short term money to help me manage my monthly budget. Most credit cards will have at least 30 days interest free and some will have up to 55 days before they need to pay your credit card bill. So put your purchases and bills on the card, take advantage of the benefits the credit card company offers, but make sure you pay each month before the due date.

There are other places also sneaking into buying now, now pay for space later. Afterpay, for example, lets you split your purchase payments over four bi-monthly interest-free installments. Of course, you will be charged a late fee (which can be pricey), so it’s worth reading the fine print before diving in here.

Make sure, before you embark on this path, that you have your trust guide in place to help you manage your money and spending habits. It’s called your budget. Without one of them, you are driving the highway of life at night, without the lights on, with sunglasses on. Sooner or later you will pull off the road and find yourself in a much worse situation than before you got in the car.

Budgets aren’t that hard to make and there are some great resources on this topic and some great apps to help get started.

Borrow for a better tomorrow

Another good debt can be a student loan. I say this with a bit of trepidation because my personal opinion is that you don’t have to go to college to get a high paying job (just ask my builder).

But if you have a career path that you want to take that requires a degree, and there is a real need for those skills, then having a student loan, which is essentially interest-free, is a big help. But try to have a plan before you take this step.

I know of a number of students who have taken out big student loans who are still not working or have low paying jobs and it is an incredible burden to bear. These days there are a lot of careers that pay off as you learn on the job, eliminating the need for a degree. At least initially, until a need arises, such as running a business, for example, and it can be used more practically. Who knows, this might be a better option for the next generation of Kiwis entering our workforce.

Keep it in the family

Of course, the last is the Bank of Mum and Dad. Usually the interest rate is zero and there is no fixed repayment date…. if ever. I say this with a bit of irony and it’s more of a warning to moms and dads rather than the younger ones reading this article because the financial decision you make here as parents could impact your own financial well-being in retirement. years.

Most of us live longer, so you need your income from your investments to live as long as you do. Depleting those assets at a time when you’re unlikely to replace them completely isn’t a big part of a financial plan. That said, if you are able to help your kids pay off their student loans or get into their first home, that’s a wonderful thing for them.

Debt can be good, you just need to follow some of these golden rules to keep yourself on the safe side while getting around some of these other crazy hurdles in life. There is always risk in everything we do (and that means doing nothing), but good debt can make a big difference to your personal and financial well-being, which for many of us will be. much longer than we ever imagined.

Golden rules:

  • Borrow money that helps you build on a sizable asset (a house, a business, even you)
  • No matter what you borrow money for, remember that someday you will have to pay it back
  • Understand the cost of your debt and understand what you need it to get better
  • bottom line
  • Take advantage of free debt to help smooth out your monthly expenses
  • But before all of that, create a budget based on your life goals so you know where your hard-earned income is going, and try to make sure it includes a savings buffer.

David Boyle is Head of Sales and Marketing at Mint Asset Management.


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