Good Debts, Bad Debts
The word debt sounds like a bad word. It has all sorts of connotaions, based on your background and past experiences. In the western world, debt keeps folks awake at nights, and makes them scared anytime the phone rings. you can loose your house, car etc for default in debt repayments. The fear of debt is the begining of wisdom.
All debts are not the same. There are good debts and there are bad debts. The way you should relate to them is not the same. Running away from all debts is like throwing away the baby with the bath water.
Let's start with bad debts. The king of bad debts is consumer debts. This is the most common type of debt and the most easily accessible, especially in the western world, and is now becoming more common in Nigeria. It can be accessed through overdrafts, credit cards, loans and advance.
Bad debts are debts you incure in the purchase of consumer items, items that depreciate to zero over time without adding any value (apart from massaging your ego). In short, liabilities. It comes in the form of car loan, credit card purchases like vacation, clothes, furniture, fittings, aso ebi etc. You cannot afford this item at this material time, but you over extend yourself to get it, for whatever reason. Borrowing to pay school fees falls into this category. It is not by force that your children must attend that school. Take them to a cheaper school, and supervise their homework, to ensure that they are not lagging behind the curriculum.
Borrowing money to pay for something that does not pay for itself and turn in a profit is bad debt.
In the world of savvy investors, taking a loan that you have to pay back by yourself is not smart. Taking a loan that others will pay for is the way to go. In simple language, the item pays for itself.
There is a huge debate over whether your home is an asset. Emotionally, it is, but financially, it drains you. The direction of cash flow is negative, that is, away from you. Anything that takes money away from you is a liability, no matter how much you are in love with it.
It does not mean that you should remain a tenant all the days of your life. It simply means you should have an asset that pays for your house. In summary, you build a house from your profits, not capital.
Now, to good debts. From above, it is obvious that good debts are debts incurred in acquiring assets. Debts you will not eventually have to pay, becuase your assets will pay for it.
A good example is borrowing money to build an estate in Lekki, either for outright sale or rent (if you are more patient). You use the bank's money to build the estate. Let's say it costs you N30M a piece for each detached house, and you dispose of it at N50M a piece. You built 50 units, and made N20M on each, meaning you smile N1Billion worth of smile all the way to the bank.
Another example is borrowing money to buy NAHCO IPO at N5.50 and sell off at N53, or if you are patient, receive the windfall bonus (3 for existing 2 or so), and then wait for a rebound, then go for it at N40. With more than 500% profit, the bigger the debt, the wider your smile. Other examples abound.
So you see a situation when one man's meat is another man's poison. What lifts one up is pulling another down. While one is waiting for a phone call, another is refusing to take his call, thinking the bank is calling to ask for their money.
One of the fastest way of getting rich is through using other people's money (your bankers). Be warned however that this turf if for savvy investors, folks that have grown through the ranks, making good use of their savings and comfortable enough to graduate from swimming in the river to swimming in the ocean.
if you are to have any encounter with debt, go for the good variety.
Galleria Finance Team
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