How to Get Better at Managing Your Personal Debt (Part 1)
Contributed by: @YemiAwop
Debt. A 4-letter word that carries quite a lot of weight. The management of loans and general debt is an important skill but it’s not something we’ve learnt formally in school. Wise management of debt can open a lot of doors and many benefits. However, poor management can ultimately lead you to bankruptcy, personal issues and limit your financial potential.
Our first exposure to debt is either through a student loan or an interest-free overdraft where we are expected to use this money wisely (Gucci belt anyone?)
For some, debt must be avoided whenever possible but for others, especially us the younger generation, debt is part of everyday life and it can be hard to get through day to day life without using something like a credit card when we are stretched. Need that dress? Swipe. Want that new Mac? Swipe. Exotic holiday? Swipe. In reality, there is good debt and bad debt. Both can be necessary, but it is important to manage both types of debt so that they don’t become uncontrollable.
What is debt?
Personal Debt = “money which is owed for which you are legally responsible for”.
This can range from student loans, mortgages, credit cards, overdrafts etc. The key distinction between different types of personal debt is if it secured or unsecured.
Secured debt is debt that is tied to an asset such as a house or car. If you fall behind in payments, the lender has the right to seize and sell the asset to recover the value of the loan e.g. mortgages and car loans.
Unsecured debt is not tied to any asset, which means that lenders do not have the right to seize your assets if you fall behind on payments. However, they can employ credit collectors to chase you down leading to a weaker credit history and possible a court appearance. E.g. personal loans and credit cards.
Why do we get into Debt?
The reasons why we get into debt can vary depending on the person and situation. I've listed four common causes which I've identified:
1. Education/training courses
Rather than paying a huge cost upfront, the fees are spread out over time.
Those changes in life circumstances or important situations such as moving home, needing a new boiler or dealing with an unexpected job loss.
3. Cash flow
It may make more financial sense to take out a loan and pay it off in instalments rather than use cash upfront. This would be financially sensible if the interest rate cost of the loan is fairly small and you may need to have cash on hand for an emergency.
Buying our “wants” instead of our needs. This is dangerous territory, as you’d be making unnecessary purchases with money you do not have.
"Surely, not all debt is bad right?"
To learn about the difference between good debt (yes, this is a thing!) and bad debt, as well as Yemi's next steps, check out How to Get Better at Managing Your Personal Debt (Part 2) | Good & Bad Debt.
Be sure to also check ADZVICE's other money posts.