Disclaimer: Please note that I’m not a registered financial advisor. The information shared on this blog is for general informational purposes only and does not constitute financial advice. For personalized financial guidance, please consult a certified financial advisor.
Debt? Personally, I’m not a fan, and ideally, in the perfect world we’d never need to take it on. However, given South Africa’s socio-economic realities, debt is often a necessity for many. Let’s then focus on using it wisely and making it work for us.
I’ve developed a framework for myself to help determine whether taking on debt for specific purchases is a good idea that can hopefully also help you.
1. Is it a Genuine Need and is it worthwhile?
Before taking on debt, it’s essential to assess whether the purchase is essential or just a want that can be postponed or substituted with a more affordable option. Needs vary from person to person, depending on individual circumstances. For example, a car might be crucial for someone with a job that requires frequent travel or late-night commutes, but not for someone who lives close to work or can use public transportation.
The value and worthwhileness of a purchase can also depend on individual circumstances. For instance, as a content creator, investing in high-quality equipment might be vital to produce high-quality content that generates income. However, for someone who just needs a phone for basic functions, a more affordable option might be sufficient.
2. Can I afford it?
Next, it’s crucial to evaluate whether the debt can be genuinely afforded. Qualifying for a loan and affording it are two different things. If the lender approves/qualifies you for a debt but you won’t have enough funds to repay the debt without sacrificing essential expenses nor have the capability to save for emergency expenses but rather will be living paycheck to paycheck then you can’t afford the debt.
Taking on debt you can’t afford puts you at risk of not meeting the debt payment requirements and in turn building a bad credit score can have long-term consequences, including higher interest rates, loan rejections, and even impacting the ability to secure apartments or jobs.
3. If Can’t Afford:
If you’ve determined that the debt can’t be afforded but the purchase is essential, alternative options should be explored. Saving up for the purchase is often the most straightforward solution if it’s something that can wait. For example, if a dream car is the goal, it’s worth keeping the current car and saving for the dream car until it can be afforded outright.
If it’s something urgent, like buying groceries or paying for transportation to work, alternative options such as adjusting the budget to prioritize essential expenses, exploring more affordable grocery options or transportation routes, or seeking assistance from family or friends might be considered.
One’s budget can be adjusted to prioritize spending and free up funds for the purchase.
4. If Can Afford:
If confident that the debt you can afford the debt, it’s essential to think about how to make the purchase work. One way to do this is by managing the debt in a way that will benefit in the long run. For instance, making timely payments and repaying the debt earlier than expected can help build an excellent credit record. This can lead to better debt terms and lower interest rates in the future. The purchase can also be used to increase income or invest in something that will appreciate in value over time.
Debt is often an unavoidable part of life, but by being mindful of our financial decisions and managing debt effectively, we can minimize its impact on our financial well-being. By following this framework, we can make informed choices about debt and ensure that it works for us, rather than against us.
If you’re enjoying my content, you can use this link to subscribe and get notified about my next post: https://illuminateunleash.com/contact/#.
Stay blessed,
Katekisani