Life & Financial Coaching

Is Debt a Four-Letter Word?

Is Debt a Four-Letter Word?

February 27, 2015

Debt. For some, this truly is a four-letter word in the nastiest sense.

My mother certainly has never been a fan of debt at all. It took her decades to even consider getting a credit card, and only did so when she was required to use a card for a flight booking.

The conservative approach to debt definitely had its merits – it was a very unmessy way of managing cashflow, with her not having to answer to anyone. What she didn’t do, though, was help her credit picture. The sheer lack of debt worked against her when she did eventually seek a mortgage. Also, all debt was viewed by her in the same way – bad and to be avoided. But, in actual fact, not all debt is created equally. There is what can be termed as “good” debt and “bad” debt.

In a nutshell, good debt has the potential to put money in your pocket through assets going up in value and giving you income (e.g. returns from rental properties), while bad debt normally takes money out of your pocket (e.g. having to pay interest on credit cards) and is often associated with consumer debt.

In simple terms, avoid borrowing for things that fall in value but let leverage work for you when the opportunity arises for things that rise in value. Keeping clear of debt altogether may mean you miss out on improving your wealth.

But at the end of the day, you are using “other people’s money” so it’s your duty to spend any credit responsibly and then pay it back. Educate yourself on the risks and whether it works for you. It might not. Managing debt is about being able to make these decisions.