Good Debt vs Bad Debt for young workers and employees

Oct 05, 2018

We see tons of articles talking about good debt versus bad debt. But, not so many on how this is applicable for young people entering the workforce. The reality is, young employees are faced with a lot of choices and temptations! Most have just finished studying and are starting a new work. Usually, this means new-found financial freedom in the form of income!

Unfortunately, money coming in isn't always that well-spent. Especially if a young adult didn't learn healthy spending habits at college!

Whether it is "Keeping Up With The Joneses" or "Trying To Do Right By Family & Friends", during this time there is overwhelming pressure on how to spend your money. This can easily lead to debt. If you are not already deep into debt with Student Loans that is. If you are not mindful of falling into the debt trap, you will be part of these disturbing statistics highlighted by BusinessTech:

  • 39% of applicants who want to go under Debt Review are under the age of 25 years old
  • 58.83% of consumers are struggling to keep up with their Home Loans
  • 53% of debtors are in the age group of 31 – 45 years old

With this in mind, let’s dive into good debt versus bad debt for young employees. At the end of the article, we will share 7 crucial tips to help you manage the fine line between good debt and bad debt.

Good Debt and Bad Debt can be subject to each individual's situation. It can depend on:

  • the type of job you have
  • the reason for having the job
  • your employment agreement (permanent, contract or temporary employment)
  • marital status
  • dependants
  • remuneration and benefits
  • whether it is long-term or short-term debt

And, the millions of other things you can declare as either good or bad debt! At the end of the day, debt is debt, and the most important thing is the consequences of it. The biggest of these consequences, is probably interest rates associated with debt.

A quick note on being prepared for “big boy” interest rates

Student loan interest rates are much lower than credit-card and personal rates. These are extremely popular products in South Africa. Unfortunately, there is little education on how interest rates are applied to them. Repayment terms for student loans are more accessible with fewer consequences when you miss payments compared to Credit Cards, Vehicle Loans and Home Loans.

Because of the gap between the two, many young workers are not prepared for the full impact of the debt you experience as an adult.

The reality is, debt will most probably form part of your life in some shape, form or size at any given time in your future. Before taking on debt, it is crucial to understand what the implication of interest will be on the total amount you pay back. To see this kind of calculation in action, you can use our loan repayment calculator.

So, can you make the financial shift from student to a young employee successfully?

The short is yes, if you approach your decisions well. The shift from student to employee is vital because there are a lot of decisions you need to make that will impact the rest of your financial future. During this time, you are most likely working an entry-level job or at least not earning as much as you want. On top of this, there are a lot of things you need to buy. These can easily include things like:

  • new clothes
  • taking over your flat lease from your parents
  • getting a car
  • getting married
  • taking care of your dependents
  • an individual's lifestyle

All of this is difficult to manage on a basic or entry-level salary, which leads many to the need for financing.

Should you take on debt? How do you know it’s good?

But before approaching the need for financing, you need to thoroughly assess where you are and where you're going.

For instance, if you are employed on a temporary contract, a personal loan, payday loan, and buying a car or a home can all be dangerous decisions as you won't have the guarantee of paying them off.

In this case, you would rather save a margin of your monthly income until you have a buffer. Or, you can pay off any short-term and student loans you might have. If you are planning to get married, this could mean 2 to 3 years of working on your base salary and also doesn't leave space for taking on debt.

Safe types of debt can include monthly subscription and contracts, like cellphone contracts. But, if you fail to keep up with the monthly payments, it will decrease your credit score.

Ultimately, there are important questions you need to ask before you make a decision. Such as:

  • Where are you going to work?
  • Where are you going to live?
  • Can you afford a car or more if you're married?
  • How are you going to travel to work if you're married?

So, how do you transition from student to young employee?

Let's face it, most students are used to living on a restricted budget. However, as you enter the workforce, the temptations are more overwhelming than when you were a student. Given that 40% of credit is being provided recklessly in South Africa, you can be sure that telemarketers will be calling you all day promising you the whole world and neglecting to tell you how much it is going to cost in the long-term.

You can end up paying 27.75% (repo rate plus 21%) and as high as 20.75% for credit card and store cards. The problem comes in when you miss these high-interest repayments! By the time you want to buy a house or a car, you do not qualify for a loan because your credit score has been negatively impacted. Or, you can't afford to buy a house, car and live within your means anymore. According to BusinessTech, some consumers in South Africa owe as much as 75% of their monthly income to creditors.

What is the answer?

If you are moving from a student to a young employee, you need to simplify, cut away and make better financial decisions that reflect where you are in life. We'll look at some tips below on how you can do this.

First, "Keeping Up With The Joneses" is the behaviour you need to be really careful of falling into.

"Keeping Up With The Joneses" is a problem many people experience after the initial excitement of being able to spend money. It essentially means trying to have what your neighbour has, even if you can't afford it. This pushes people into unnecessary debt they cannot afford to pay back.

There are simple ways to combat this behaviour and the most important way is to be content with what you have. If you are not, save up and buy it debt-free as far as you can. If you are already in the "Joneses pit", you can get ahead again by counting some numbers and a smart repayment strategy. The reality is, you need to realise that the Joneses are not the ones who are going to have to pay for the debt you accumulate trying to keep up with them.

Essentially what you want to do, is avoid unnecessary debt as much as you can. If you could buy your dream house debt-free you would, but since you can not, you need to plan for your future so that you can live your life financially independent. This means a careful balance between your available cash flow and the amount of debt you shoulder. You can use these tips to get the balance right.

7 tips for balancing the line between good debt and bad debt

Tips for young employees to live a financial-burden free and balanced life:

  1. Draw up a decent budget and stick to it. This will give you a financial direction. You can use this simple monthly budgeting tool to make it happen.
  2. Track the little expense foxes. Keeping track of your expenses and your cash flow is vital for your on-going financial health. Our simple cash-flow tool will help you catch the foxes.
  3. Prioritise debt. Do the first things first and not the first things last. Your interest will go beyond the usual snowballing effect if you delay your debt repayments as credit facility companies add interest upon interest.
  4. Start saving immediately. Having savings tucked away helps a lot on rainy days and on meeting financial goals. When something unexpected happens, you will be able to carry some of the weight instead of putting more debt on your shoulders. 5.Live within your means. If you can't afford to eat out 5 times a month, don’t. Focus on practicing financial discipline, because having KFC every night will not be good for your health and will not be good your finances now or later. If you're struggling with discipline, start making a small change and focus on improving to more changes!
  5. Stop trying to Keep Up With The Joneses. You do not have to get the latest tech tool because everyone has it. If you can do your work on a simpler device, then choose the simpler device above the extra instalments.
  6. Make strategic credit facility choices. High outstanding balances and unsecured loans are risky business. If you miss a payment on these type of debts, the interest can quickly cripple you. Chip away at big debts, get your savings goal and manage small debts smartly to start getting ahead, little by little.

To sum it all up, take an inventory of where you are and where you are going, avoid unnecessary debt and live according to your budget.

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