Good or Bad Debts, which one do you have?

This month we want to talk about Debt and investment.

We will start with Debt, we will discuss good debts if there is any and what qualifier’s as bad debts, then in the 3rd week we shall start on investment where we shall discuss the various decisions to consider before investment……………..

What is debt? This is an amount of money borrowed by one party from another. Debt is used by individuals as a method of making large purchases that they could not afford under normal circumstances.

The later part of this definition is very important, so please take note of it as it is the basis of categorizing a debt as either good or bad.

Any time before you borrow ensure you’ll in the right frame of mind, meaning not in a hurry, read clearly the fine lines as well as the payment plan involved, there is of course consideration of those few emergency periods, which is allowed. Other than that borrow purposefully.

If you’ve ever wondered whether it is good to be in debt, allow me to answer that question with a YES at this point, my yes has some qualifications though.

It is okay to borrow or take a loan only if you intend to use the finances for investment purposes, this could be you’re borrowing to start a business, borrowing to buy a piece of land, taking a loan to buy a house, borrowing to pay school fees or any form of investment that will yield a better return.

A better return means the benefit that will accrue from the investment should be more the interest that will accrue on the borrowed amount, if the interest on the borrowed amount is say 6% the benefit from the investment should be more than 6% not equal to nor less than, if that is the case that is not good debt, if that’s not the case then that falls in the next category of bad debts.

Always remember if you have to be in debt, you must have something to show for it, not something to feel.

Now if I go back to the above question, ‘whether it is good to be in debt?’, at this juncture I say NO, my reasons for this is, if the finances are for leisure, going to a party, buying someone a gift, or even attending any type of function then that is bad debt.

Remember in our budget article https://mbuguaandassociates.com/personal-budget-planning-phase/ when we planned our finances, well, if that function has come and the finances that you had allocated for such events is over and you do not have any bonus’ or surplus from any windfall income, then proudly decline the invitation and be very honest about the reasons for declining, which will be lack of funds, but then you can purpose to make up with a gift in the following month’s budget, that way you maintain the relationship and your financial discipline and commitment.

Always remember you should not borrow for fun or leisure.

In next week’s issue, we discuss how to keep a good credit reputation and how to have more borrowing power.

Take-home: Only be in debt if you have to be, and make sure you have something to show for being in debt.

                    There is freedom in saying NO than in a comprised YES.

Mbugua & Associates.


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