Growing up, I always envied people who had nice things such as cars, an expensive smartphone, beautiful Brazilian hair and fully furnished apartments, to name a few.
I wondered how exactly they could afford all these things and dreamt of the day I would own them too. I swore to work hard enough to be able to afford them, but as I grew up and started working, I realised I couldn’t even afford half of these things.
I later found out that most people who have these luxuries got them by putting themselves in debt. They received the goods but were still paying them off.
However, it has come to my attention that most people don’t realise debts aren’t always good; there are actual bad debts out there which you don’t need.
Freelance editor Lisa Smith contrasts the two perfectly. According to Smith, if the debt you take helps you generate income and increase your net worth, it is a good debt, but if you borrow money to purchase depreciating assets, it is bad debt.
In other words, if these assets don’t go up in value or generate income, you shouldn’t go into debt to buy it. Examples of good debt include small business loans, getting a home equity loan or even student loans like those offered by the Namibia Student Financial Assistance Fund.
By investing in your education, you will gain knowledge and skills you can use to get a good job and earn an income.
Examples of bad debt include credit cards, cash loans or even buying a car. Let’s say I borrow N$130 000 to buy a car I have to pay off over a period of four or five years. Interest will be charged on the amount owed and even if I sell the car several years later, the value of the car will be less than what I paid for it.
Buying a car is an asset that is guaranteed to lose value over time. It will go from N$130 000 to say N$70 000 or less over five years. Basically, owning the car brings me zero income and skill so it becomes bad debt. But a car can also be good debt if you buy it for business purposes.
So how do you know you have too much debt? I recently read an article on debt.org where they explained an amazing debt-to-income ratio metric that can help you figure this out. Start by adding up all your monthly debt payments and divide them by your monthly gross income to get your debt-to-income ratio.
For instance, if you have a N$4 000 monthly mortgage, a N$2 000 car payment and you still pay N$2 000 a month for credit cards and other bills, your monthly debt is N$8 000. If your gross monthly income is N$16 000, it means your debt-to-income ratio is 50%. It also means you should be losing sleep because you are in too much debt!
It is evident that debts will always be part of our lives but it’s also important to ensure you are only investing in good debt. You may incur bad debt, but do it only when really necessary. If you find yourself unable to decide on whether to take on a debt or not, maybe the wise words from our first lady Monica Geingos will come in handy: “If you go into debt because you are paying to study, that’s a good debt, but if you go into debt because you want expensive shoes, that’s a bad debt.”
It helped me make wiser choices; perhaps it can help you too.
Natasha Lientjies Domingo is a fiction writer who is passionate about literature. She has written two books and is currently working on her third which is a book series. Find her on Facebook as ‘Tasha’s Short Stories’.
