Debts: Avoid Being Crushed By Them
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Debt: The Sting in the Tail of Borrowing

Debts can crush you, or help you, depending on how you manage them

How to avoid being crushed

When you take out a loan or mortgage, you are adding to your level of debt.

Debt can be a good thing. For example, with good debt you might be able to:

But debt can also be a bad thing. If you incur bad debt, as a result you might:

The real difference between good and bad debt is the financial impact of what you use the money for.

Good debts are incurred when the money is spent on:

Buy a house, or grow a business, is usually good, because you get an appreciating asset. Also, somewhere to live and a job are both essential requirements.

Bad debts are incurred when the money is spent on:

Examples include holidays and clothes.

There are some things you can buy that can be either good or bad debts, depending on your circumstances. For example, a car is a depreciating asset. However, if your are a taxi driver then it is an essential purchase and, whilst the car itself will depreciate, it provides the taxi driver with a return from the business. For a private individual, a car would provide a 'return' if ownership of a car provided a saving on other transport costs greater than the cost of running a car.

Produce a budget

To avoid being crushed by debt, you should have and follow a personal budget, that follow the principles of:

Through your budget should ensure that you will always be able to meet all your bills and loan repayments, no matter what circumstances may arise.

Produce a personal balance sheet

A personal balance sheet is simply two lists: what you own (your assets), and what you owe (your debts).

To produce a personal balance sheet:

Your "net assets" are calculated by subtracting your debts from your assets.

Your aim should be for your net assets to be positive and growing. That is, the value your assets should always be greater than the value of what you owe. And when you borrow more money, aim to make your net asset value grow, not reduce.


For more help, see our article on practical ways to reduce your debt.

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