“Bad” debt versus “Good” debt

Posted on April 8, 2015 12:30 am

At his age of 26, Carlos Philly (not his real name) already has what most of us admire and want. He has a house in a real estate development in Kololo, an upmarket residential area in Kampala, a BMW X5 series, a beautiful girlfriend, one cute puppy and a business of his own. He is one of the many Ugandans I described as super rich recently.With a monthly income of about US$9,000 from his carpentry factory, he used to put half of his earnings in the bank each month.””I need to capitalize my savings but I don’t have time to do so,”” he told me few days back in an online exchange.He has eventually become an investor after what he describes as Robert Kiyosaki’s advice, “”Don’t work for money. Make money work for you”” and to him the only way to achieve financial freedom was by investing his money.””Contador Harrison I’ve become a customer of a wealth management service. This way, I can have my financial freedom and, most importantly, prepare for early retirement,”” he told your blogger who also wants to retire at an early age of 35 years.Today’s uncertain economic outlook calls for consumers to think about what they actually need to spend to maintain the lifestyle they are accustomed to and carefully assess if they have the financial flexibility to cope with changes in circumstances.

Although consumers may start thinking about spending big on home renovations, holidays and vehicle purchase to take advantage of the relative strength of their countries economic growth, especially when prices decrease due to falling inflation, consumers need to exercise prudence in their spending.My aging mother has always reminded me that I should evaluate carefully if I really need to take a loan, as debt can be a complex issue. It is therefore been necessary for Contador Harrison to be able to differentiate between “good” and “bad” debt.But you may ask me what is good debt ? In my thinking it is essentially the debt that helps one make payments for essentials one does not have enough savings for at the moment, but can well afford in the long run and such debts essentially create values.In technology world, I have seen cases first hand where debt used intelligently has delivered positive results and built small companies into multi million brands.Debt, if used prudently, can be leveraged to one’s advantage in certain circumstances. Depending on the individual’s unique circumstances, the “freed-up” cash can be used as emergency reserves to prepare for a rainy day. Or, it may be used by savvy investors especially in technology sector who can generate returns in excess of the interest rate they pay on their loans.

On the other side,I consider a bad debt as the one a person stretches himself beyond his means, overspends as a result, and is unable to settle his loan repayments. As my mothers always reminds me, the general rule of thumb,is that my total personal debt should not exceed 36 percent of my gross income irrespective of the source be it business, salary or investments returns. I have also learned that debt-income ratio, keep in mind that many people fall into such debt traps through the accumulation of late payments and interest charges as well is a bad debt.What the young wealthy Uganda bloke reminded me was that its good to be careful to avoid turning “good” debt into “bad” debt by considering factors such as other existing monthly payment obligations, fixed and variable as well as possible shifts in the economic climate, to ensure am comfortable with the monthly repayments and prevent unnecessary late payment charges. Of course, even after careful planning there may be instances when your blogger need to make adjustments to his cash flow, or would require a loan for that matter.On such occasions, I’d prefer to go for personal loans in the market that gives me repayment flexibility in case am not able to meet repayment deadlines for any reason.In conclusion, a debt can help any individual, and can be a positive when taken responsibly.We all know it’s almost impossible to live debt-free.

Contador Harrison