One of a series of blogs from real people sharing real experiences, observations and advice about being good with money.
Simon Palfrey is a 22-year-old student at Massey University in Auckland. He is studying towards a degree in Communications majoring in Public Relations and Journalism. Simon currently works in the health and safety sector and enjoys sport and spending time with family and friends in his spare time.
Have you ever found yourself marveling at how cheap the weekly payments on a new 60 inch, LED, 3D television could be? Don’t worry, you’re not alone.
My generation has grown up with credit and interest being a normal part of our spending habits. The truth is, if we had to front up with the money on the spot, we probably wouldn’t buy as much stuff.
Opportunities for easy, interest-free loans (like hire purchase agreements) are a-dime-a-dozen these days, and it can be easy to overlook the burden of a debt when it comes without interest.
“But wait a minute,” you might be thinking, “if I can afford the small weekly payments why shouldn’t I take advantage of the offer?” Well, when you crunch the numbers at the counter this may be true, but it can be hard to plan for the future with debt hanging over your head. Lingering debt can prevent you from saving in the short-term, securing your long-term financial goals, and impact on your credit score.
Good and Bad Debt
The harsh financial reality of life is that we won’t always be able to avoid debt. That’s why it is important to get a grasp of what good and bad debt means. Growing up in a family of accountants meant lessons about debt were drummed into me from early on.
My first lesson was that, unfortunately, bad debt is accumulated very easily. Spontaneous purchases using credit cards, and high and low interest loans for rapidly devaluing items is a fast track to bad debt. Borrowing money to purchase items like a brand new car, big screen television or the latest smart phone means you will be paying a debt, and more, for something that decreases in value as soon as you open the box. Think twice before you snap up that consumer good at a ‘bargain’ price.
Alternatively, good debt is when you loan money for assets that will retain their value or help you to make more money in the future. A mortgage is an example of good debt, because, although the loan amount is large, property usually continues to grow in value. A student-loan is also a good debt. By borrowing money to gain a tertiary qualification, you will have a better chance of improving your future earnings.
Like I said, debt isn’t something that we can always avoid, but for those non-essential purchases, trying kickin’ it old school and save up instead of giving in to the pull of instant gratification and going in to debt. This way you won’t be borrowing someone else’s money, and often, saving the full amount helps you decide whether you still want to make the purchase.
If you find yourself desperately needing something but don’t have the money saved, then an interest-free loan is the next best option. While it would be better to avoid the debt altogether, an interest-free option helps you to avoid the debt growing. If you can, pay back the loan as soon as possible, or at least at a higher rate than the minimum payment. The sooner the debt is gone, the sooner you can start to save.
So, before making a financial decision that will result in you taking out a loan, think to yourself: is this good debt or bad debt?
If you are studying or training and want to know how BNZ can help you manage your money, read more about our tertiary benefits for students and apprentices.
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Young Money: The stuggle is real - when to save and when to splurge
Young Money: Fortune favours the thrifty
Young Money: Big cities on small budgets
Young Money: Haunted by the ghost of mismanaged finances past