In an effort to help individuals to make sound financial decisions, whether you are beginning your professional career, an entrepreneur, a trader, employee or nearing retirement, the financial literacy series will provide you with the tools and resources you need to make informed decisions regarding your financial well-being now and in the future.
Debt management and the risks associated with it
Debt is the sum of money owed or due. In most cases, a debt is a financial obligation, outstanding payment or amount due for payment on a loan, good or service or mortgage which must be paid.
Debt can be considered good or bad depending on what it is used for:
Good debt – when you take a loan/facility for an investment that will grow in value or can generate a long-term future income (the interest rates are lower than other types of loans). An example is taking a loan to pay for your education or to expand your growing business.
Bad debt – is debt incurred to purchase things that quickly lose their value and do not generate long-term income. Bad debt is also debt that carries a high interest rate, like a loan for marriage, outdooring ceremonies’ debt etc. The general rule to avoid bad debt is: if you can’t afford it and you don’t need it, don’t buy it.
In a very volatile economy like ours, where the interest rate regime is so unstable and inflation is very volatile, it is very important to consider investments that can generate high returns.
Never pick a loan/facility with interest that when calculated would be more than half of your earnings.
Note: Debt can help you start a business or grow your existing one.
©Jerry J. AFOLABI is a financial & Economic expert who believes that ordinary people can do extraordinary things when given opportunity. Email; [email protected]