Monday, October 5, 2009

Debt and How to Deal

So now that you have learnt the basics of budgeting, banking and saving we can build upon these basic skills and move onto more advanced money practices like debt management, investing ect.

Today's Money Talk segment is going to be dealing with debt and how to manage it. There are many important principles and mounds of information however because the majority of you are still students I have decided to filter the information and concentrate on giving you what would be most applicable to your lives as opposed to rattling on about irrelevant concepts that have no place in your current financial life cycle.

Firstly it is very important to realize that there is both good and bad debt and that at some point in your life you are going to be in contact with both to varying degrees. There are always going to be people wanting to loan you money and get you into debt so that they can make money off of you. Banks and lending institutions get you by charging ridiculously high interest rated were by you can end up paying more in interest than the amount you borrowed in the first place. This also applies to store cards. Do not be fooled! Store cards are simply another form of debt. They lure you by saying that you can have anything you want and you only need to pay a small installment each month but again you can often end up paying more an the item price itself.

Good vs Bad debt
Good debt - this is when you borrow money for something for which you do not have the money but the item increases with value over time. This is called an appreciating asset. Examples are buying a home and getting an education.

Property, for the most part increases in value over time this means that you can sell it for more than you paid should you ever need to. Education is an investment in you, "you are making yourself a sellable commodity." Education is priceless and you should never underestimate its value.

However, good debt is still a form of debt and should be payed back as soon asd possible.

Bad debt - this is when you purchase items on credit which are consumable and/or which decrease in value over time. These are known as depreciating assets and should be avoided when possible. Examples of these are: food, clothes, furniture and cars.

Bad debt is not always unavoidable and when these things happen it is important to know your options.

Unavoidable Bad Debt
There are times when bad debt is unavoidable:
  1. Bad luck - car accident, medical problems, being unable to work for a period of time.
  2. Necessity - needing a car to get to and from work
  3. Interest rate fluctuations - a rise can cause you to pay even more on your debt
  4. Once in a lifetime experience - this can be a study abroad programme, educational trip, concert. These are often luxuries rather an necessities. 
What are my borrowing options
 The unthinkable has happend and you need to borrow money, what are your options. There are a few options at your disposal with varying interest rates and repayment schedules.

These are:
  1. Family and friends - This is often the cheapest option. Interest is low or sometimes nothing and repayment options are flexible. However, it is always best to keep it professional and keep to a repayment schedule.
  2. Study loans - These often have very favorable repayment schedules and interest rates as they are very keen to have your business as a successful graduate. 
  3. Home loans - These are normally the lowest interest rates of all as the bank has the reassurance that they can reposes the house at any point if necessary.
  4. Overdrafts - Interest rates here vary and are often well above the prime rate making them not a very good option in terms of paying back your debt.
  5. Hire purchase - This is for example when you borrow money to buy a car. Basically, you are renting the car until you have paid it off. The rates on such a purchase are very high.
  6. Credit cards - Credit cards are the easiest way to get into debt and the most expensive to pay off as the interest rates are astronomical. 
All in all, when borrowing money for any purpose it is also vitally important to read the fine print as there are often penalties for both paying late and paying your loan off early.  

What are your thoughts? Is this useful to you? Do you have any debt reducing tips? Are any of you studying by means of a study loan? Do any of you have store or credit cards? How do you resist temptation and keep yourself out of debt? Leave a comment :)

Have an inspirational day :)


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