Good and bad debt and how to manage it

Just Property have recently launched a first-to-market educational campaign that enables them to capitalize on the large number of residential tenants flowing from their expansive letting portfolio – a trait quite unique to their group – allowing them to approach tenants to guide and mentor them towards responsible and sustainable homeownership.

According to Paul Stevens, CEO of Just Property, “We have realized that many of our tenants have never believed in owning their own home or thought it might actually be possible; whether it be from a lack of know-how, a bad or negative credit profile, little or no deposit, and/or insufficient affordability”.

A key feature of the homeownership journey is the responsible management of debt. Tenants participating in the Just Property Homeownership Journey will be given access to a free mobile budgeting tool to track their spending. The app is available from Tenants are able to create a monthly budget, capture expenses on the go and check on a regular basis if they are living within or beyond their budget. The budgeting tool is made available to tenants to help avoid falling into the debt trap.

Good and Bad Debt, and how to Manage it

Good debt is generally debt that attracts a tax deduction because it has been used for a tax-deductible purpose such as acquiring an income-producing asset like a rental property or shares. In our current low interest rate environment that may not sound like much but it has a dramatic effect over the longer term. Some examples of ‘good debt’ are:

  • Mortgage bond debt
  • Your education
  • Your Business

    Bad debt makes you poorer and is the dependence on credit card expenditure, store card car credit, car loans and anything that is a lavish expense such as holidays and furniture used to buy liabilities.

    It is advisable not to risk real estate if the business is in a weak position within the market. When you offer real estate as collateral, you should have a solid business position. Prudent business owners will carefully consider whether to borrow on their equipment to finance ongoing operations or expansion. It is important to have a strategy not to accumulate any more bad debts.

    Step 1 – Make a list of all your consumer (bad) debts. This includes credit card, car loans, school loans, home improvement loans on your personal residence and any other bad debts you have acquired. You can even include your home mortgage in this list. 

    Step 2 – Next to each items listed make 3 columns:            

  • Amount Owed
  • Minimum Monthly Payment
  • Number of Months 

Enter the appropriate numbers into each column. To arrive at the number of months, simply divide the amount owed by the minimum payment. 

Step 3 – Based solely on the Number of Months begins ranking each debt. Put a “1” next to the lowest number of months, a “2” next to the 2nd lowest number and continue up to the highest number of months. This is the order that you will be paying off your various debts. 

Step 4 – Pay the minimum amount on every debt you have listed EXCEPT for the one you’ve marked with a “1.” On this first debt to be paid off, pay the minimum amount due plus the additional R800 to R1500. Keep doing this each month until your first debt is paid off. Scratch that first debt off your list. 

Step 5 – Pay the minimum amount due on every debt you have EXCEPT for the one you’ve marked with a “2.” On this debt, pay the minimum amount due, PLUS the entire amount you had been paying on debt #1. For example if on debt #1 your minimum amount due was R400 and you added the additional R800 then you were paying a total of R1200 each month. On debt #2, if the minimum amount due is R500, you will now pay R500 plus R1200 or a total of R1700 per month. 

After a debt is paid off then take the total amount you were paying on that debt and add it to the minimum amount due on your next debt to get your new monthly payment. You will be amazed at how quickly this amount adds up and how quickly your credit cards, car loans, etc. are paid off. Continue this process until all the bad debts on your list are paid off. 

Step 6 – By this time the monthly amount you are paying on your last debt is likely to be quite substantial. Keep paying that amount every month. Except now – instead of paying it to creditors – you pay it to yourself for only one type of purchase: assets that give you positive cash flow each month. You will be out of the Rat Race faster than you ever dreamed! 

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