Good debt, bad debt, and how to handle it

Is debt bad, or is it good? It all depends on your situation.

Debt is good when it has a positive effect on your financial future. It's bad if you're buying unnecessary stuff and falling behind on repayments.

This is good debt

Before you tell your friends you've ‘invested’ in a new surfboard or the best winter coat make sure your debt is necessary. Make sure your good debt is something that you can make money from.

Here’s a list of good debts:

• Home loans - Homes go up in value year by year, which means your mortgage is an investment in an asset.
• Student debt - Student loans are good debt because they help you to get a high paying job.
• Business debt - Lending to start a business or expanding your current business and make more profit is a good idea.

This is bad debt

The debt you have on things that has no value or you as a consumer buy goods and everyday spending with nothing to show but a balance.

Everyone wants to live well and own nice things. We tell ourselves we need those takeaways, shoes, beers or that new iPhone.

If you are carrying a balance on all that, you are paying interest on interest and it’s eating away at your financial future because it doesn’t make you money.

Good consumer debt

Nothing is black and white in life and there are times when loans or other debt can be good. Let us say you need tools for your trade as a builder or hairdresser. That’s good consumer debt.

Buying a car can be good if you need a car to do work. Any extra spent on it, for instance, buying a flashier set wheels or some flash mags to go with it that is bad debt. The best medicine is, to be honest with yourself.

When mortgage debt goes bad

It is considered to be normal in New Zealand to extend mortgage every few years to consolidate your credit card debt. Consolidating the debt reduces your costs, even if the extra debt is paid off over 3-to-5 years. You are supposed to pay your mortgages down and if you are putting a new car, you will end up in debt when you retire.

When student debt goes bad

If you borrowed for a qualification that isn’t going to lead you to earn more than you would without it, then you are wasting money. Even more, if you’re partying away the student debt, you’re only shooting yourself in the foot. 

Paying down your debt can benefit you

This helps you build up a good record on your credit file. That will help you for the next time you need a loan or get a mortgage.

The best debt to have is the one you’ve paid off. Whether you borrowed for something you needed or to go on holiday. The sooner you can repay it the better.

Take a dose of medicine, write a spending plan by separating the must-haves from the nice to haves with figures in debt repayments and start paying it off.

How to handle the curveball of finances

Now and then life will throw you with a curveball that directly or indirectly impacts your finances.

Let say your furnace dies or you’re expecting a child and you realize you will need to upgrade your home in the not-too-distant future.

You don’t want to dig yourself into a deeper hole because you are not going to be able to manage the financial side of things.

Here is how to handle the situation and how to avoid it and bounce back sooner rather than later.

1) Lockdown your spending

Stop spending more than what is necessary. Some of the easiest ways to do that without changing your lifestyle too much you must:

• Cancel any unnecessary subscriptions.
• There are so many online providers charging a subscription fee, there are bound to be some you can cancel. Keep the subscriptions that you love like Netflix for movies or Spotify if you love music, but get rid of the rest.
• Cut back on luxuries.

2) Review your budget

We are a proponent of creating a budget if you don’t have one yet, now’s the time to get it.

Start by signing up on Credit Simple. Use your online budget tracker. It connects to your financial institutions and automatically tracks and categorizes your spending. If you already have a budget, now is a good time to revisit it. Your financial situation doesn’t stay the same forever. Pull your budget out for a re-review and see if there is anything else you can cut.

3) Check your hardships policies

If you are still having a hard time after tightening your finances, you would want to reach out to your bank, lenders, utility companies and anyone else that owes you money.

They often have policies that will temporarily halt your payments or reduce them, so you can continue and avoid late fees and defaults. The last thing you want to do is make a difficult situation worse by going deeper into unnecessary debt.

4) Cash-out any of your rewards points

If you have any rewards programs that generate points or give you credit card rewards, you do have the option to convert your points to cash or use them like cash toward your next credit card payment.

Using your points for cash usually doesn’t go as far as using the points toward merchandise or flights, but it may be worth it if you need to help yourself for another month or two.

5) Make minimum repayments

The moment life throws you a financial curveball, it makes sense to hang onto as much cash as possible so that you can pay any unexpected bills that cropped up. For example, if your dog has emergency surgery, you’ll probably want some cash handy for any unexpected prescriptions during the recovery phase.

This means it might make sense to reduce some of your loan payments to the minimum so that you don’t find yourself back where you started when yet another bill comes knocking.

6) Get some help

If you feel like you are drowning and you find that your financial situation is more than you can handle alone, different not-for-profit organizations can help you wherever you are in New Zealand. These organizations include FinCap and the Citizen’s Advice Bureau.

Stay strong, you can do this

Everyone has experienced situations that test our finances at one time or another. Often more than once throughout our lives. The key is to take immediate action to keep your finances from hitting the ground and spiralling out of control.

If you find yourself in such situations test your mettle a little, it's never too late to start thinking about a curveball account or an emergency fund as we all know it. The savings account that was specifically set up to help you through hard times like this. If push comes to shove you may have to take out a short-term loan to help you handle the emergency.