Debt can be used most efficiently in order to grow an investment portfolio and purchase items that we need before we have acquired the full purchase amount. This is only possible, however, if debt is managed properly and wisely. Debt can have positive effects, but it can also have severely negative effects.
There are two types of debt: good and bad. Good debt, quite simply put, is manageable and sustainable. When you have what you need and are staying on top of your monthly repayments, you are in a good credit position, i.e. you manage your debt well. This is a common situation for many people who buy houses, cars or perhaps a few other expensive items, for which they can afford the repayments. Affordability of debt refers to monthly repayments that are due in order to pay back the amount that you borrowed.
Bad debt is the opposite: you over-extend yourself and are unable to maintain repayments to your creditors. This means that the debt that you have incurred is unaffordable. This is typically caused by bad spending habits when people buy too much too soon, but it can also happen in the case of a hike in the interest rate or the tragic and often unavoidable loss of employment. In order to manage your debt situation you need to manage your lifestyle. There is an old idiom “cut your coat according to your cloth” - a basic budgeting principle to ensure that your costs do not exceed your income.
