Troy Bygrave, business relationship and sales manager, JN Bank, says while many Jamaicans are raised to believe that they should avoid debt at all costs, this approach to financial management may not necessarily be the smartest.
He was addressing a recent professional development seminar for graduates and final year students at the University of Technology’s, School of Allied Health and Wellness, on the topic, “Realising Your Vision for Financial Security.”
He advised graduates that it is good to borrow. “Credit is there to help you to acquire assets so that you can build wealth. Very few people earn enough money to pay cash for life’s most important purchases, such as a home, car or a university education; therefore, loans are often unavoidable.”
The goal is to borrow wisely, he pointed out, explaining that the most important consideration when buying on credit, or taking out a loan, is whether the debt incurred is good debt or bad debt.
To better understand the concept of a good loan, he said the old adage “it takes money to make money,” is quite applicable. “Good debt helps you to generate income and increases your net worth,” he advised.
The JN Bank manager gave examples of a good debt, which included taking out a student loan to pay for a university education, buying a home or starting a business.
“A university education increases your value as an employee, and raises your potential future income. In general, the more education an individual has, the greater that person’s earning potential,” he reasoned.
He further noted that education has a positive correlation with the ability to find employment; hence, better educated workers are more likely to be employed in good-paying jobs, and tend to have an easier time finding opportunities, as the need arise. “An investment in a university degree is likely to pay for itself within a few years of the newly educated worker entering the workforce. Over the course of a lifetime, educated workers are likely to rack up a return on investment measuring in the hundreds of thousands of dollars,” he said.
Taking out a loan to finance a viable small business venture is also considered good debt, Mr Bygrave advised.
“Making money is the whole point to starting a small business. If that business does well, it will end up being worth far more than the loan you originally took out,” he said.
Mr Bygrave further advised the graduates that taking out a mortgage to buy a house is considered a good debt, as well. “A house is generally an appreciating asset; and, therefore, in most cases your home is likely to increase in market value over time, enough to cancel out the interest you’ve paid during that same period,” he explained.
He noted that residential real estate can also be used to generate income, by taking in a boarder, renting out a section, or the entire residence. He added that an auto loan can also be a good debt, particularly if the vehicle is essential to doing business.
“But, unlike homes, cars and trucks lose value over time; therefore, it’s in the buyer’s best interest to pay as much as possible up front, so as not to spend too much on high-interest monthly payments,” he advised.
He further explained to the students that bad debt is debt incurred to purchase items that quickly lose their value and do not generate long-term income. “The general rule to avoid bad debt is if you can’t afford it and you don’t need it, don’t buy it,” he said.
“If you buy a fancy, $20,000 pair of shoes on your credit card, but can’t pay the balance on your card for years, those shoes will eventually cost you over $20,000, and by then they’ll be out of style,” he explained.
The JN sales manager also noted that credit cards often get a bad name, but said they can be a good tool to have. “A credit card is a good loan, as it is a free loan. If you pay your bill on time and in full, you avoid paying any interest at all,” he said.