Many people are under the impression that when we get into financial difficulties through bad debt, that it is because of the volatility of foreign exchange markets, the wild swings in stocks and shares, or rampant inflation.

Although all of the above-mentioned are serious factors that can affect anyone’s wealth, the most common cause of getting into bad debt is the lack of financial literacy. People don’t understand the basics of finance; especially in developing countries like South Africa.

Financial literacy isn’t that complicated

As soon as the words “financial literacy” are spoken, many people conjure up a picture of bankers, finance consultants and accountants. While it is true that all of these professionals are financially literate (having done well at school and gone on to university to obtain degrees etc.) their level of financial knowledge is far above what is needed in order to gain a simple understanding of finance.

If you want to learn the fundamentals (and more) of how money works, there are many places you can go to, and this page on the Wonga.co.za website provides an excellent start.

Money basics

For the ordinary man and woman in the street, the day-to-day knowledge of how money works revolves around where money comes from, and what it costs to get it, and whether or not the cost is affordable.

Some people are fortunate enough to inherit money that has been willed to them when someone dies. On rare occasions, some lucky individuals win large sums of money in lotteries. But for most ordinary people, the only way to get money is to earn it or to borrow it.

The cost of living is always on the rise. For most people, the money they earn at work just about covers the essentials.

For those who are lucky enough to be left with some disposable income (the money left over after basic living expenses and bills have been paid), this can be invested in some form of savings account. There are many types of accounts and investment vehicles, and this is where gaining a higher level of financial literacy comes into play.

What to consider when borrowing money

For the vast majority of people in countries like South Africa, the amount of disposable income they have is very limited. This means that when unexpected demands come along, or they badly want or need a costly item that is out of their usual financial reach; the only way of being able to buy such a thing is by borrowing money.

Borrowing money has had a lot of bad press. It emanates from people who have overstretched themselves and cannot afford to make their loan repayments. This is called bad debt – for obvious reasons.

However, if you do your homework properly, and you work out how much a loan will cost you (including any repayments and interest), and you determine that you can afford to make those repayments easily; this is known as good debt.

Making informed decisions

Make no mistake. There is really no such thing as good debt. Debt is debt, and you are better off without it. But the reality of life is that most of us need to borrow money at some time in our lives. Who, for example, can afford to buy a house without raising a mortgage?

If you do need to borrow money – do yourself a favour and become financially literate (at least regarding the basics) before you go-ahead. Making informed decisions is always better than simply blundering ahead.

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