Why everyone should learn about debt?

Why everyone should learn about debt?

1. Builds on your financial literacy

Financial literacy sounds so fancy. However, it’s really just a long-winded way of saying 

Debt makes up a huge part of financial wellness because it determines so many things. Credit, income, interest, loans, investments, expenditures etc. When you’re deep in debt, these things are grossly exacerbated. When you’re managing your debt well, these can be leveraged to  help you build a better quality life.  You see, understanding debt is almost like a domino-effect. You build on your understanding to positively impact other facets of your financial life.

Debt literacy contributes to financial literacy which eventually adds to financial wellness, which is really the ultimate goal here. 

2. Improves your financial decision-making

Considering debt can either add to your financial wellness or take from it, understanding it helps equip you with better financial decision-making skills. Specifically, understanding the difference between good debt and bad debt. Should I take this loan? Should I buy this product? Is this a depreciating asset? How much interest do I incur on this?

For someone new to personal financial management, these questions may seem overwhelming -almost as if you’re being asked to predict the future. However, if you’ve taken time to understand what kind of debt works well, what adds value to your life, what improves your earning potential/quality of life, these questions become simpler to answer. 

Informed decision-making is vital when it comes to financial wellness. Knowing how to make money work for you is a far more superior feeling than feeling like you’re always working to make of pay-off money. 

3. Helps manage & grow your wealth in the long-term

As we’ve been talking about for the past month, there is a huge difference between efficient debt and inefficient debt. 

Efficient debt helps generate capital and ultimately, helps you build wealth. Inefficient debt doesn’t help you build growth capital and instead could make you incur more loss.

What we’ve come to learn is that ‘debt’ doesn’t have to be such a dirty word. While it incites fear in the hearts of many, it also has the potential to inspire intrigue and opportunity in many others. When you master the balance of getting rid of inefficient debt (e.g paying off your credit card debt) and leveraging efficient debt (e.g borrowing to invest), you stand to really improve your quality of life. 

4. Unlocks new investing options

Using debt to invest is actually a lot more common than you would think.  Some of your favourite millionaires have mastered the art of borrowing to invest and it has made them millions of dollars. Yes dollars not shillings. 

Like I said earlier,  efficient debt can help generate a large amount of growth capital. Now, don’t get me wrong, I’m not saying everyone should run to the  bank, take out a loan to start investing in land and other businesses. What I am saying is do your research because it’s a little more nuanced than that.  To start, it’s important to note that small-time investors like you and I tend to use margin loans as opposed to diving right in and investing in stocks. Margin loans are considered to be secured lines of credit which allow people to  borrow funds with the intention of investing. Now, the loan doesn’t just disappear after you borrow it,  the key to using debt in order to unlock new investment options lies in balancing the interest rate. High interest rate loans are extremely difficult to manage, whereas low-interest loans are easier to pay off over time, freeing up your investment and balancing your credit score, thereby opening you up to more loans in future.

See, learning about debt doesn’t have to be an algebraic equation, it can be as simple as starting with 4 simple steps. Learning about debt, how to manage it, how to leverage it is such a crucial part of one’s financial wellness journey and there journey towards building a better and more financially secure life. 

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