The three best days of my month are the days between my salary landing in my bank account, and all my debit orders coming off it.
The cost of my car, my credit and student loan are all debts that at the time, felt unavoidable, but the question must be asked: were they really?
Is it even possible to live a debt-free life?
Good Debt vs Bad Debt
It’s important to differentiate between good and bad debt. Good debt can make your financial life easier than having no debt at all. This is debt that you take out for something that may be very expensive, but provides long-term value to your life.
Good debt is about a long-term investment in your own future.
A home loan is certainly classified as good debt– you’re buying a home and thus stability. A loan to buy a vehicle, assuming it’s not an overpriced, flashy sports car that you cannot afford, is also a positive.
A student loan with which you pay for a good quality education that’ll help you get a well-paying job later in life is another example of good debt. Good debt is about a long term investment in your own future.
Bad debt is about short-term gratification– a shopping spree on your credit card because you were feeling sad, a holiday taken with a personal loan because all your friends were going, and then a loan to pay off your credit card and your holiday loan because the banks are hassling you.
These are all examples of bad debt, that can never be justified.
Is it Possible to Avoid the Good Debt Too?
As much as we may know those car and student loan repayments are for a good cause, that doesn’t make it any more painful when that money disappears from your account every month.
It is possible to live a debt-free life, but it isn’t easy. It takes dedicated savings and years of forward planning.
After my father had paid off his home, the same home I had been brought up in, the same home he still lives in, he swore he’d never again have debt. He cancelled his credit cards and implemented a serious savings plan.
Since that day my father has bought two cars, both new, and both in cash. For both he began saving for the car at least 3 years before the purchase.
Avoiding all debt involves two things: careful planning and scrupulous saving. If you’re looking to buy a car that costs around R100 000 you need to start saving R3 000 a month for at least three years prior.
While doing this may feel the same as having the money taken off your account each month to pay the loan, the difference is that you’ll be EARNING the interest as opposed to PAYING the interest.
If you have R50 000 in a high interest savings account and you’re earning 3% a month on that account, you’re getting R1 500 a month on interest which will help you reach your goal all the faster.[tip title=”moneysmart tip”]Sign up to moneysmart and set a goal to help you stay motivated and to track your progress as you work towards saving for your goal.[/tip]
While the same rule applies for a home it may prove all the more difficult. Even a cheap home is likely to cost you over R500 000, and while you save for that home you still need a place to stay so you’re most likely paying rent on top of that.
Just because it feels impossible, doesn’t mean it is. If you begin saving for a home years before becoming a homeowner is even an option, making use of a long-terms savings vehicle, you could be much closer to your target by the time the urge to settle down comes along.
Even if you’re not, the larger your deposit on a home the stronger your negotiating power and the less you can end up paying in the long run. Whether you can reach the goal or not, it’s worth it to begin saving for that house now.
Of all three, this one is probably the easiest to avoid. The first key to avoiding a student loan is to work hard and get good marks.
The higher your marks the more likely you are to qualify for a scholarship or a bursary, and many universities have rewards programmes where you get money off your tuition for excellent marks.
[tip title=”moneysmart tip”]Constantly apply for scholarships and bursaries. Every year the National Research Foundation puts out hundreds of thousands of rands in scholarships and bursaries, the entirety of that money is almost never claimed.[/tip]
Students do not apply because they do not think they will get it. There is a lot of money out there to fund education, make regular trips to your institution’s bursary office and apply, apply apply.