Posted on

Difference between good debt and bad debt

Good Debt and Bad Debt 

Written by R. A. Stewart

Do you know the difference between good debt and bad debt? One needs to be used with caution while the other is to be avoided like the plague.

First the basics.

When you are borrowing money you are paying for the use of that money and that is called interest. This adds to the cost of what the money is used for. Therefore, it is important that you save and use your own money if at all possible.

There are some things which it may not be possible to use your own money such as a student loan or a mortgage because these are major investments, however, most people will contribute a portion of the money needed such as a house deposit.

Good Debt

Listed below are things which are considered to be good debt:

A Student loan

Mortgage

An investment with a higher expected return

Good debt helps to build your wealth.

Listed below are things which are considered to be bad debt:

Bad debt

Vehicle

Household appliances

Veterinarian bills

Travel

Consumables

The reason why these are bad debts is because you end up with little or nothing for your money.

Bad debt does not contribute to your financial well-being, it is detrimental to it.

It is important to know the difference between an asset and a liability. An asset increases your wealth while a liability reduces it.

How to manage debt levels

Pay off debt as fast as possible

Avoid paying high interest rates for consumable items

Stay within your budget

If you don’t have the money you don’t buy it.

Build an emergency fund; this would be a separate bank account from your every day personal account. An emergency fund will ensure that you have money on hand for anything unexpected which crops up.

People with debt do not have any discretionary spending money. These people will probably disagree, but honestly; going on an overseas holiday when one owes money to someone is irresponsible and selfish. It is like giving the middle finger to your creditors.

One should avoid credit cards like the plague. These are for greedy and selfish people. A good money manager will not own a credit card, because to them, “debt” is a dirty word.

Learn to live within your means and to stay within your budget. Prosperity is a matter of choice. If you don’t have any plan for increasing your wealth then you choose not to be wealthy. I do know of many people like this who purchase a lottery ticket every week and that is their only hope of becoming wealthy.

Do not envy those who drive around in a fancy car and live in an expensive house. For all you know these people could be up to their eyeballs in debt. Just live according to your own means and let others do the same. 

To summarise

Good debt is when you borrow for an asset which has a payoff which makes it worthwhile paying the interest for the loan. Bad debt is when you borrow for something which has no lasting value.

About this article

You may use this article as content for your blog/website or ebook. The contents of the article may not be applicable to your personal circumstances, therefore discretion is advised.

Check out my other articles on www.robertastewart.com

 

“Retire with Little Money” is your guide to achieving financial freedom, even if you don’t have a large retirement fund. This practical ebook reveals creative strategies and smart budgeting tips to help you retire comfortably on a modest income. Learn how to cut unnecessary expenses, boost your savings with side gigs, and make the most of the resources available to you. With easy-to-follow advice and real-life examples, this book shows you how to build a sustainable retirement plan without relying on a hefty nest egg. Start planning today, and discover how you can retire sooner than you think!

 

https://robertalan.gumroad.com/l/sdzvl

Posted on

The cost of financial gifting

The cost of financial gifting

Written  by R. A. Stewart

Most parents want to help their children any way they can. It is the natural thing to do but there can be a high cost to this if your generosity is at the expense of your own needs and wants.

Here are some of the most common ways family’s make gifts.

House deposit

The New Zealand consumer magazine says that on average, parents gave $108,000 in 2022 to their children for house deposits. 62% of parents used their own savings. 

That money taken out of their own retirement savings will have a big impact on how much they will have when they retire. 

What parents need to consider is how much that money they are going to give to their children would be worth if they invested it in the markets. I am no mathematician but even so, know that this is an enormous amount of money that they are sacrificing. 

Some options need to be considered and one is guaranteeing the loan. If your son or daughter is able to take out the loan and parents guarantee the loan then this may be better. The parents still have their capital producing an income while at the same time their children are paying off the mortgage.

Early inheritance

It is good to leave an inheritance to your kids but not if they are just going to fritter it away and have nothing to show for it years later. After all, you were diligent enough to save and invest your money; if your kids have no interest in financial management then you are better off enjoying that money yourself or leaving it to a worthy cause. Another option is to have the money deposited into their kiwisaver so that they at least have the money when they reach the retirement age of 65. If your grown up children have learned to be responsible with their money then they will have their own kiwisaver account.

Getting your kids out of debt

Some parents will rescue their kids from debt time and again. It all depends on the circumstances of the debt. If your children have made a habit of getting into debt without learning how to manage without using credit then it is time for them to get budgeting advice. If it is you who have to make the sacrifices then it is time to put your foot down. 

Lending for businesses

Some folk approach mum and dad for loans to fund their business. If you lend money to your kids you are missing out on the capital gain that you would have had if that money was invested in the markets. It is also worth keeping in mind that most businesses fail within five years so that money could be gone in no time.

Lending for a wedding

The average cost of a wedding in New Zealand is around $30,000. It is a huge amount when you consider that most marriages don’t last the distance. If you stumped up the cash to pay for your child’s wedding, that $30,000 that you could have invested in your own retirement fund will mean that there will be a lot less money when you retire.

Educational loans

In New Zealand student loans are interest-free, so it just does not make sense to pay off your children’s educational loans when that same money could be invested and grown. Is it any wonder that student loan debts total over 2b in New Zealand. In 2021 there were over 14,000 kiwis who owed over $80,000. 

About this article

The information here is of the writer’s own opinion and may not be applicable to your personal circumstances, therefore, discretion is advised.

You may use this article as content for your website/blog or ebook.

Read my other articles on www.robertastewart.com