Most athletes, early in their career, start dreaming of their shining moments; moments where thousands of people will be cheering their name in a packed stadium; moments when money will not be their main goal, but rather a means of solidifying their success! As an athlete, even if you eventually reach this point in your life, your choices must be taken after careful consideration as money earned within many years, can disappear in just a few moments.
When you hear the word ‘debt’, you understand that ‘debt’ means borrowing an amount of money and repaying it after a certain period of time, with an additional amount of interest. Having a debt means that you owe something to someone and in most occasions what you owe is money. But, is there such a thing as good and bad debt? If yes, what is the difference and how can we understand how important they both are?
A ‘good debt’ constitutes money borrowed which will offer you a long-term return. In most cases this kind of debt has a low interest rate and is affordable in terms of repayment. In fact, this type of debt may provide you with added revenue streams in the future. Some examples of good debt are:
- Education loan – This kind of loan is a typical example of good debt. Student loans will give you the opportunity to earn a university degree without worrying about tuition fees. It will offer you the opportunity to earn a higher salary due to the fact that you have a university degree. Sports careers do not last forever and therefore a degree can be considered as an asset after your retirement from sports.
- Buying real estate – Owning property is quite important because it can be utilized in different ways. Buying a house or other property when prices are relatively low, means a long-term investment that can earn you a return either immediately or in the future. Depending on the location of the property, you may either reside on it or earn money through renting it out. Regardless of which of the two you choose, your property might increase in value and you will then be able to sell it at a profit, meaning that you will earn more money than you initially spent to buy the property in the first place.
- Investing in your own business – It is crucial to have an income right after the end of your professional career as an athlete. Borrowing money to invest in your own business, given that you have a good business plan, will offer you the opportunity to create a promising financial future after the end of your career. Obtaining a bank loan with affordable terms will help you get your business off the ground and it will create the possibility of recurring income streams.
On the other hand, a ‘bad debt’ is considered to be a debt that was taken for the wrong reasons, with the wrong financial terms. It’s a type of debt that does not provide any real future investment and in most occasions has very little durability, meaning that it’s most probably an investment on something that you want rather than on something that you need. Examples of bad debt include:
- Credit card debt – Credit cards have relatively high interest rates, so using them for any purchases, without taking into consideration your repayment ability, could make things really messy. Even if credit cards offer you the opportunity to spend as much as you want, do not forget that this amount will have to be repaid at the end of each month, and most probably with a very high interest rate.
- Spending in pleasure – When you spend money on things such as luxurious holidays or expensive clothes, keep in mind that if you cannot pay upfront, you should better think twice before incurring those expenses. Getting into debt to finance luxurious consumption leaves you with nothing but debt at the end; no asset or investment to show for! The most known bad debt example is when you spend your money on ‘wants’ and not ‘needs’.
- Buying an expensive car – If you do not need a new car then do not buy a new one! Getting a loan to finance an expensive and fast car that will lose its value within 2-3 years, is considered a bad debt.
How to avoid bad debt
In order to avoid being drowned in bad debt, you should always research and compare costs and prices in order to find the best deal on whatever you need to buy. Purchases should not be made spontaneously as it’s hard to resist the initial thought of owning something. Alternatively, after carefully considering the price and comparing it with other products, you’ll be able to make a wiser and more beneficial decision. In addition, when in the process of getting a bank loan, try to compare the terms with different banks so that you avoid higher interest rates. Furthermore, make sure that upon taking the loan, you will be able to cope with repayments given your monthly income.
Being in debt is not the end of the world, it is actually a very common thing for every individual, including professional athletes like you. The most important thing is to be able to identify and separate your needs from your wants which will pave your way to becoming financially successful. Choose to spend your money wisely, save for the future and never forget that your playing career will not last forever!
For more information on identifying good and bad debt and how you can become financially stable, please get in touch with us via e-mail at firstname.lastname@example.org.