How wise is that debt?

Tuesday January 22 2019



James Abola

James Abola 

By James Abola

Jane (not real name) is facing financial challenges. A few years ago, Jane lost a lot of money when her main customer, a supermarket, became bankrupt and closed. At the time of closure, the supermarket owed Jane a lot of money which it has never paid to date.
After the collapse of her business, Jane learnt to borrow money to survive. Overtime, the level of indebtedness grew to a level where it is naturally impossible for Jane to repay during her lifetime. When she realised she can never repay her debts, Jane stopped making any effort to earn income. Instead she now borrows money to pay for everything she wants or needs. The experience of Jane and other people teach us that there are three categories of personal debt.

Good debt
This money borrowed to fund business or investment. A good debt enables the borrower to earn more money than if he or she had not borrowed. This is because the debt provides financial muscle to take advantage of business or investment opportunities that would be out of reach. Some like borrowing because the pressure to repay makes them to work a lot harder.

Bad debt
This is money borrowed for consumption or speculation. There are people like Joan who borrow money to pay for personal or family expenses. During December, many people borrow money to pay for Christmas expenses. But in January, they are confronted with the burden of repaying the debt while taking care of expenses such as school fees.

Unwise debt
I think we should introduce a third category of debts known as stupid debt. This is money borrowed and spent on things that neither earn more money nor meet real needs. For example, borrowing money to pay holiday expenses.

James Abola is a business and finance consultant. Email: james.abola@akamaiglobal.co.uk

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