MONEY MATTERS with Ken Barnes: Is there anything like a good debt?
Posted by Isaac Amo Kyereme | Posted in African Business, African Market USA, African Trumpet News, Education, Features, News, American News,
Debt- defined loosely as an amount of money owed to a person, organization or nation for funds borrowed is one of the most talked about topics in any household and financial planning workshop. Countries and Nations devote whole ministries and boards to discuss and manage debt. My church, The Solid Foundation Chapel, is currently treating debt as a topic in our practical living series lessons. I have personally over the years taught many workshops on Debt and how to get out of debt. So I will like to discuss an aspect of this all important subject-debt this month!
According to the Federal Reserve, the total consumer debt outstanding in America stood at $2.4 trillion in 2010. According to them, Americans charged approximately $1,950 billion to their credit cards in 2006. That's just over $11,300 in charges per cardholder.
Progressive Debt Relieve, a credit counseling firm, reports that “Over 40% of US families spend more than they earn”. According to them, the typical credit card purchase is 112% higher than if using cash.
Debt causes so much havoc anywhere in the world, to nations, kingdoms, corporations, churches households and individuals. It is no respecter of persons, religion, age, gender, creed or race. It does not discriminate.
It has caused people to kill themselves, lost their jobs and become alcoholic. Debt has engineered divorces, separated families, brought about family feud and schisms and brought down nations. Many have been sick and are still sick due to debt. People have stolen and other languishing in jails due to debt. Many people have been killed because they owe! Others have killed because they are owed. Debt weather incurred by an individual, household, an organization, or a nation is never pleasant.
So the question arises as to whether any debt at all could ever be classified as a good debt and another bad debt. The answer is an emphatic yes!
Debt is not always a bad thing. In fact, there are instances where the leveraging power of a loan actually helps put you in a better overall financial position Some of your debt might be considered an investment. You are probably thinking, “How can anything as bad as debt be considered an investment!” If you took on the debt to purchase something that will increase in value and can contribute to your overall financial health, then it’s very possible that debt is a good one.
So the magic question is “will this borrowing, swiping, charging, putting it on the credit card etc contribute in the long run to my financial health and will what am buying or spending on increase in value in due course?”
A mortgage loan is one debt that increases your value of life and contributes to you positively in the long run to your financial health. The advantages of home ownership are numerous. Apart from the net gain in equity all things being equal, it also has the added tax advantage where the property taxes paid, interest charges on the loan and some of the closing cost become tax deductable. Throw in the social and psychological benefit of home ownership to the household as the icing on the cake.
Student loan is another debt that seeks to add value to your financial health and so can be considered a good debt. For parents, when it comes to paying for your children's education, allowing your children to take loans makes a lot of sense financially than liquidating or borrowing against your retirement fund. That's because your children have a lot of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. “What's more, a big 401(k) balance won't count against you if you apply for financial aid since retirement savings are not counted as available assets.” said one proponent.
It's also argued that it is unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.
Borrowing at a lower rate to finance a viable business venture is another example of good loan. That is leveraging, using other people’s money (debts, borrowed money) to make money. I have personally seen and counseled businesses and business owners to use American Express credit cards to finance part of their capital and cash flow needs in the short to medium term and they have come out great in the long term.
Some form of Car purchases could also be a good debt although I must tread carefully on this point. Cars generally lose value as soon as it is driven out of the dealer’s lot. Buying a car on credit as a necessity to go to work and to aid in your business ventures to me is wise and is a good debt because the car is helping you to add value to your financial life and health. A car purchase however becomes a bad debt when it is purchased to boost your ego, so called prestige and not purchased out of need but want.
A common thread runs through all the debts mentioned above, as already stated elsewhere in this write up - Good debt is taken on for a sound reason and there is an expected payoff later!
How about the financing of air travels, could that be termed a good debt? Your relation passes and you need to travel in an emergency situation, what about that. You and your wife travel on a vacation on your credit card to as it were rekindle the “fire” in your relationship! And by so doing you saved your marriage. Isn’t that debt worth incurring? My answer will be it depends! If the air travel is for a business then it qualifies to be a good debt because it is aiding the creation of wealth, but if is for fun, then I don’t know about that!
I will be quick to add that what is beneficial or good should not always be measured in financial terms! Sometimes there are moral, ethical and cultural issues involved which should be taken into consideration! Should you leave your sick mother to pass on because you don’t want to incur debt? I will leave you the reader, to answer that!
Care however should be taken in decisions to spend in instances like what I just cited. A lot of wisdom and moderation devoid of emotions should be exercised and applied.
I have always maintained that decisions to spend should not be reduced to dos and don’ts! It is very discretionary and based on prevailing circumstances and situations. But there should be also a lot of thinking through and what ifs asked!
The objective for my column has always been to remind you of those fundamental financial truths you already know and to equip you with new ones so you can live a victorious financial life! Let’s hope this write up has done just that!
I thank you for your responses! Feel very encouraged by them! I must say this write up was as a result of some questions some of you sent along the same subject line.
Happy Easter to all my Christian Readers!!!
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