Debt is often the most common thing that can keep people up at night. The ghosts of their accumulating debts often haunts many people around the world. According to a 2017 survey from Pricewaterhousecoopers, an estimated 53% of wage earners fret over their finances.
Some debts may keep you worried, but there are those that can help you secure your financial future. You just need to know where to invest your money to avoid losing its value. All debts are not equal – some are bad and some are good.
Good Debt Versus Bad Debt
The difference between good debts and bad debts is if they increase your value or net worth in the long run. It is crucial to learn how to see the difference between bad debts and good debts so you will know where to put your money.
Good debts can be instrumental in helping you produce income and eventually increase your net worth. Examples of this type of debt are:
- College education. Having a college education is often linked to future success. People believe that they have a more significant earning potential when they study for a higher degree. Getting a good education can also help you get a stable job with a good employer. Investing in education gives you a higher potential to make more money in the future.
- Real estate. Real estate involves the purchase of a lot, house, or both and living in it for some years before opting to sell it for profits. It can also generate profits through rentals.
- Investments. Investing in stocks or bonds provides you the opportunity to earn in the long run. You need to know which type of investment to acquire. You may choose from precious metals, bonds, stocks, insurance, and more.
- Business ownership. The whole point of owning a small enterprise is to augment your income. This venture is a form of good debt because as the business grows, your profits and net worth will also increase.
Bad debts are the ones that decrease in value. They do not generate income. Instead, they lose their worth over time. Some examples of bad debts are:
- Cars are expensive, especially the new ones. A car may seem like a necessity because you need it to get to work and to run your daily errands. However, you are wasting your money while paying high interest on a car.
- Clothes and consumable goods and services. Buying expensive clothes is like throwing away your hard earned money. These items will not add value to you.
- Credit cards. A credit card is the worst type of bad debt. The interest rates are excessively higher than regular consumer loans. Keeping a credit card is never a good idea because you are just throwing away your money just to pay for the interest.
Promoting Good Debt Management
Businesses should consider good debt management. It is better to properly manage your debts before they become unmanageable. Supporting good debt management within your business finances must start from you, the owner. Here are some tips on how to do so:
- Research. Before you apply a business loan, do your research. Check the interest rate and review if the debt will be profitable in the future. Otherwise, it is not worth investing in it. Find investment options that can increase your revenues. Avoid purchasing assets that depreciate over time.
- Estimate. Estimate your expenses. List down your costs and eliminate the ones that your business does not need. Non-essential items such as magazines, outdated office equipment, and unused membership fees are some of the expenses you should remove.
- Compare. Comparing the pros and cons of a decision is helpful in good debt management. It is best to compare the benefits and the drawbacks of a debt or investment before making a final decision. This practice allows you to see which one will add more value to you.
- Plan. When it comes to debts, it is essential to schedule your spending. Some businesses tend to overspend on useless things. It is crucial to plan every cent to avoid incurring more debts.
- Prioritize. It is always advisable to prioritize your creditors. Make sure to pay them on time to avoid having adverse effects on your credit score. Debtors placed their trust in you that you will pay them back on time. Their confidence in your ability to pay is what made them lend you the funds. However, if you break that trust, you will no longer have a chance to borrow money from them anymore.
Good debt management starts from the owners down to the financial managers. If you do not lead by example, your business’ finances will eventually get depleted. If you’re finding yourself in need of professional assistance, perhaps an insolvency specialist might help you in your problems.
Hasib Howlader is both a Chartered Accountant and a Chartered Tax Adviser. He has a wealth of experience in all financial matters, including things that a insolvency specialist would deal with having cut his teeth at both UBS and PricewaterhouseCoopers before moving to direct his own Chartered Accountancy practice. The breadth of his specialisms, as well as his business experience, makes him extremely valuable when dealing with liquidation matters.