“You must gain control over your money, or the lack of it will forever control you.”
~ Dave Ramsey ~
Debt is everywhere. You can even purchase your groceries on credit in South Africa. With the current economic state of the country, many people have no choice but to buy on credit.
These decisions to make debt to ensure your livelihood is sustained, or even just to survive month to month can quickly become overwhelming.
In this article we discuss three of the most crucial questions that you should ask yourself before choosing to make debt.
Question #1: How Will My Actions Affect My Credit Score?
There is good debt, and bad debt. Good debt is debt made and used only for those aspects of life which we could not avoid, or which we needed. Bad debt, on the other hand, is debt made and used for luxuries. Think of the new car on the market. You really want it, but you have a car that runs perfectly. Your car does not look very nice, and if you managed to get the finance for the new car, you would be the envy of everyone.
This is an incorrect decision regarding debt. You are throwing yourself into a financial contract that will depreciate as time goes on. Even if the car looks incredible now, accidents happen, time wear and tear on the car will happen whether we like it or not. The car is also never going to be the same value which you paid for it. From the moment you buy it, it begins depreciating.
On the flipside of using a car as an example. Perhaps your car needs a service and you do not have the finance to carry the bill. A small loan to cover the costs would be considered a good debt.
Question #2: Is this Debt a Necessity or a Luxury?
Making debt should never be taken lightly. Wherever possible you should be paying cash for items and not taking them on debt. This is the ideal situation of course, and making debt is usually a lifesaver.
Before choosing to sign yourself into debt, make sure that you ask whether the item is a necessity or a luxury. Take a moment to write down what life would look like without this item, and what it would look like with it. For example, you need a new wardrobe, but you do not have the cashflow to go shopping. A clothing account would not be as much as you think every month and is perfectly affordable to you at this time. The issue does not arise with affordability in the present moment, it arises when we experience an emergency and have already made debt to fit our affordability. Making more debt would render you over-indebted.
This is why it is imperative that you choose wisely and never make debt for luxury items, only necessities.
Question #3: What Will This Item Look Like 3 Years from Now?
Instant gratification is a huge selling point for creditors. Having the item of your desire right now is so tempting, that it takes a very disciplined person to say no all the time. Instead of seeing all the items that you want as they are, imagine them in three years. Clothing will definitely not look the same. Cars will change. Loans will have been spent and most items, except for a house, will have depreciated. Unless of course you do not look after your home.
A home loan is one of the better debt choices. Property value rises and falls with the market, but it always keeps value. With everything else on credit, you will be losing, and the amount of stress that you will subject yourself to because of instant gratification and superb marketing from the creditors, you need to be strong to resist taking that apparent upgrade in life.
No matter how you choose to work with your finances, remember that debt is not always your friend, and it will hurt your financial health if you are not careful. It is wise to act with wisdom and understanding instead of reacting impulsively. It is not easy, but if you put your mind to it, you can do anything.