Debt: Is it really that bad?

 

Nandjila’s story

It’s payday! Field days and paydays are my favourite workdays. I love my job – about 80% of it… It’s work, so it’s okay. I don’t think I know many technical people who are ecstatic over admin anyways. So, back to today. I get to go on my monthly solo dinner date to one lucky restaurant in the city. This month, Olivia’s Kitchen made the cut. I’m so excited!

I recently made a decision to do more self-care after some dark months. See, I went through last year depressing over my finances, but I decided to stop. I mean, almost everyone I know has a car loan. I also owe from a loan for my masters. It’s an education, so I think it justifies the debt. But I’m kind of sick of this townhouse taking the most of my money though. It makes mom proud and allows me to provide shelter for my siblings. But maan, is this what adulting is about?

I make okay money and thought I would have good savings by now. But with all that debt, plus more from clothing accounts from when I was fresh out of varsity, I have very little savings. I miss my earlier days of working. I didn’t have many responsibilities. My concerns were mainly centered around clothes, friends and Chris. Stupid Chris…

Back to the present… With all that debt, my love for shoes, providing for my siblings and travel goals, I was stressed! So I decided to only meet the minimum installments, live life and take care of myself. I will pay the debt off when I do.

You know what’s funny though? Even when I feel like I’m drowning in debt and can’t possibly fit any more payment in my budget, I still get messages from the bank saying I qualify for more debt. I wish they did emotional checks with their credit checks. I need to understand this debt business more.. ‘Nandjila! Nandjil’ee!’

Oh, got to go. I’m dropping my little sis off at KFC to catch a taxi to school on my way to work and we’re late!   

 

Let’s talk about debt

Debt is money that you owe and have to pay back, usually with interest. There are different types of debt – short-term, long-term, etc. based on the period term. The essence of the good or bad of debt can be found in what it was acquired for.

Good debt is debt obtained for investments or things that increase in value or bring in returns. Examples of good debt can be a loan that you take out to fund a (good) business, some mortgages and other investments that may bring you returns. For example, it is possible to save and invest to buy a house cash. However, it might take you longer (depending on the saving goal, monthly investments, etc.). Because of time value of money, the housing prices might also increase by the time you’d have your eggs ready. Because of these reasons, most people use debt. Depending on the terms, Nandjila’s mortgage could be good debt.

TonG Tip: Always be aware of the terms of the loan and negotiate!

Debt is bad when its sole purpose is to enable consumption without any financial value. You might think – ‘But having the car of my dreams and the good things in life is a good enough return for me’. Which is okay. However, if you think about the current value of the things you ‘loved’ 2 years ago, it’s probably less or non-existent. A pair of shoes may be all you want; all you think about today. But it will get old and be replaced by another pair in a year or 2. This can apply to furniture, phones, TVs or vehicles.

When you take out debt, you are borrowing from your future income. This means, you will use your future income to pay off this debt. Think about your future self, slaving around to earn an income to pay for things you don’t value, when you can’t afford the things you want now. Debt reduces your disposable income. So use it for things that will bring you financial freedom.

It’s not wrong to elevate your consumer life. But, it comes down to affordability and prioritizing. If you have bigger goals, having debt on everyday normal things makes you pay more for them (interest). It also diverts your attention. Like, you are chasing financial growth, but you are also paying interest on a pair of shoes… I would like to introduce you to this rule below that I love:

“If you can’t pay cash, you can’t afford it.”

You can apply the above rule for bigger purchases like vehicles. However, if you are not able to, it’s okay. Just remember to be careful about the amount of car debt you get into before reaching your financial goals. You don’t have to be cheap to the bone, the goal is to use money as a tool to fund your dream. Even if that means settling for a car that you don’t really like right now.

 

I have bad debt. What should I do?

 

The goal of the Growth Tribe is to alter today’s habits to change the future. We don’t cry over spilled milk. But we do clean up the spill. So, if you have bad debt, you want to pay off as much, as quickly as you can so you can focus on the main goal. This is not to say neglect your health (physical or mental). Self-care is important. But it doesn’t have to be material. It can also still be within reason and your budget. 

We’ll use the snowball method, which allows you to pay off the debt with the lowest amount, cross it off and move on to the next debt. Here’s the plan:

1. Save at least one month’s equivalent of living expenses as a cushion in case of emergency. Refer to this post to calculate your living expenses.
2. Take a pen and paper + calculator
3. Make a list of all your debt in ascending order (from the lowest amount owed to the highest)
4. Pay the minimum installment for each debt and as much extra as you can to the one with the lowest amount.
5. Once fully paid, move on to the next debt.