The issue of debt is polarizing in both business and personal finance. On one hand, borrowing can help fuel good decisions — taking out a mortgage to buy a house or condominium we can afford, paying for tuition in a promising field, or buying some equipment to expand business opportunities. Good debt. On the other hand, borrowing money to support an unsupportable lifestyle…gaming systems, cars, clothes, trips and restaurant meals? Or borrowing to pay rent for a business that is clearly heading south? Bad, bad debt.
The COVID-19 quarantine has presented us with an unusual situation. We may have created a solid financial plan that included contingencies for emergencies both at home and for business, but few of us could have been expected to plan for a quarantine lockdown lasting several months. Despite the benefit of some government assistance programs, many of us have necessarily turned to credit cards, lines of credit and loans to keep us afloat.
Even in quarantine, here are five things you should think about before you take on debt:
Is the debt you’re taking on meant to solve a short-term crisis or a long-term problem?
Taking on short-term debt to overcome an illness, get you through a quarantine, or help pay an unusual number of bills that just happened to arrive at the same time is probably a good thing. Your future income and revenue will be able to reverse that debt once the problem passes. If you’re routinely flipping your utility bills and business rent onto a credit card or revolving line of credit that never lays down and dies, and doesn’t even understand the meaning of the number “zero”, you’re not solving problems — you’re creating them.
What problem are you solving by taking on debt?
You need to ask yourself why you’re using debt as a tool to solve your financial problems. If you’re spending too much to begin with, taking on debt is only making your problem worse. The COVID-19 quarantine has helped a lot of us realize that we’re simply spending a lot of money that we really don’t need to spend, from expensive work lunches to renting office space that we apparently never really needed because we work more productively at home. Eliminate unnecessary spending first, then reassess your need to leverage debt. Tools like the Wallet Personal Budgeting App can help you understand how controlling expenses can improve your overall financial health.
How much is credit card debt costing you?
Look at your credit card bill. The minimum payment they’re asking for sounds like a sweet deal. It’s probably affordable and if you just pay it off on time, nobody will send you ugly letters in the mail. But contained in that same bill is a message, usually in tiny type, that tells you how long it will take to pay off that debt if you make just the minimum payment each month and how much the interest would cost you over time. In some cases, the accumulated interest would cost way more than your balance over payback periods that last decade. Paying more each month can slash those costs and the payback time. The Financial Consumer Agency of Canada offers a great online tool that can help you plan your way out of credit card debt.
What sort of future opportunities is debt costing you?
Managing your debt isn’t simply costing you the sum total of your interest payments. It’s costing you future opportunities. Imagine that interest payment money being used to save for a down payment on a condominium, plump up your RRSP or RESP, or make investments for your eventual retirement instead. When you eliminate debt, your overall financial picture looks a lot bigger and brighter. You can learn more about the value of eliminating debt at any stage in life with online training resources like these.
What’s your exit plan?
Debt isn’t a way of life. It’s a tool that can help you achieve personal, financial and business goals when you’re in control. When the tool controls you, it creates stress, limits opportunities and drains your finances. Before you take on debt, develop an exit strategy that shows you how you’ll put that debt in the rearview mirror one day.
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