April 2026 Finance Newsletter: Good Debt vs Bad Debt

There is a right and a wrong way to use debt. The wrong way can harm you, but the right way can give you access to life-changing new opportunities. Learn how to tell good debt from bad debt, and never let it get the better of you again.

THINK BEFORE YOU DEBT

Using debt is a trade-off between having something now and sacrificing your future income to pay for it. In some cases this trade-off makes sense and in (most) others it does not.

Debt should only be used if you have a steady, predictable and regular income that allows you to faithfully pay the required instalment or more. Debt should be reduced and then eliminated as you get older and approach retirement. You should never use your pension income and retirement savings to service your debt.

THE WRONG WAY TO USE DEBT:

Reckless spending: Some credit providers advocate living “tomorrow’s lifestyle today”, but using credit cards, retail accounts and overdrafts to pay for a lifestyle you can’t actually afford only makes the credit provider rich. Debt is not a magic wand to extend your income. Things you buy on debt today have to be paid back next month (and a few months after), at a higher rate. Debt doesn’t extend your income so much as it places a burden on your future cash flow.

Ignoring cash flow gaps: Many consumers use debt as a way to bridge a consistent gap in their cash flow caused by poor budgeting. This is very dangerous. In the long run you can only spend what you earn, so discipline yourself to write down your income and expenses and plan accordingly so that all your essential expenses are paid for and rather build up savings to pay for luxuries and unforeseen expenses. If you’re unable to eliminate your shortfall by controlling your spending, you may be over-indebted. Speak to a professional sooner rather than later.

Borrowing From Peter to Pay Paul: If you’re making debt to pay back other debt, you’re caught in a destructive debt cycle and should seek help urgently. Rolling debt is both dangerous and expensive.

Depleting Your Assets: Resist the temptation to make debt against the rising value of your assets, specifically your home. Credit providers will always try to extend your debt, so they can earn more interest, but this will not benefit you in the long run because:

• Asset prices rise and fall, giving rise to ‘boom and bust’ cycles in the economy. The moment everyone is convinced that asset prices will continue rising, they are most likely to fall

• Assets don’t pay back debt – debts must be paid back out of your income

• The growth in the value of your assets should be part of your long-term saving plan. Acquiring more debt on the back of rising asset value protects the interests of the lender but does not grow the value of your net assets.

THE RIGHT WAY TO USE DEBT:

Fortunately, there is a way to spend debt wisely. That’s when debt works for you, not against you, in the long run. If making debt will put you in a better financial position down the line, it’s a worthwhile investment, but be realistic. You will always need to adjust your spending for a few months until the debt is paid off.

Here Are Some Examples of Constructive Debt:

• Security: Buying or improving your house to provide security for your family

• Education: Educating yourself or your family to improve your income-generating potential

• Entrepreneurship: Starting a small business that requires capital investment

• Easier travel: Buying a reasonably-priced car for traveling to work and transporting your family

• Genuine emergencies: Smoothing out short-term unexpected expenses when you don’t have adequate emergency savings. You should always try to spend less than you earn, but when unexpected expenses result in a genuine emergency, make sure you adjustment your future spending so you can pay back the debt quickly.