Many people think that any debt is automatically bad. Well, no. There is good debt and bad debt.

“Good” debts are those that help increase income and professional development. Borrow, for example, €5,000 to complete a course that will help you in your career and provide you with a higher income. If, however, you borrow €5,000 just to go on holiday to Thailand, you’ll find yourself in debt when you get back and likely to have the stress of losing it.

Low-interest debt that helps increase your income over time is an example of good debt. Good debt can become bad debt (in the event of a financial crisis, job loss, etc.), but bad debt rarely turns into life-saving debt.

Mortgage – good or bad?

In most cases, they are considered “good” debts. You will become the owner and have a rather valuable asset. But attention: the rate should not exceed 30-40% of your salary. If you have a salary of 1,500 euros, your rate should not exceed 450 euros. If your dream home is putting pressure on your income, consider refinancing or moving to a cheaper neighborhood that will make your credit easier.

Is a car loan a necessity or a necessity?

For some, a car is necessary in everyday life. If you are an entrepreneur, you need to meet with clients or run for goods. In short, it is a necessity that helps business growth and development.

But for others, a car is not a primary need. I can easily get to work by public transport, but why can’t my colleagues see what a new car I have afforded?

Tip: If you decide to buy a car, keep your car loan rate within 15% of your salary. And keep in mind that the term for which you take out a car loan should not exceed 4 years.

If you are a business owner and a car helps you carry more goods and therefore sell more, the terms of the discussion change…

What are bad debts?

Bad debts are high-interest debts that are used for discretionary spending or things that lose their value quickly (phones, TVs, etc.).

Sometimes bad debt is good debt gone bad, as we said above. An example is credit card debt. If you have a credit card and pay off the balance every month, no problem. But if you’re racking up credit card debt, you could be in trouble…

How can I protect my finances if I have “bad” debt?

If you have bad debt, you can protect your finances by managing your money responsibly. Consider what steps you can take to avoid financial ruin.

Start by making a list of unnecessary expenses. Identify ways to cut costs to generate higher net income. Give up cigarettes if you smoke. Stop drinking 3 cappuccinos a day, just one. Do you really need 3 streaming subscriptions? Instead of two phones, maybe you can get by with just one…

It is equally important to have an emergency fund. Ideally, this fund should be equivalent to 6-9 net salaries. A fund to turn to when good credit turns bad.

But if you take into account the above, then such a moment will never come. It’s all about protecting your money so it can protect you.

The “Financial Dictionary” section is supported by Alfa Bank

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