By Vasilia Polycarpou, The Sports Financial Literacy Academy
Living in a material world where we aspire to have and experience the best things in life, the temptation of making impulse purchases on credit can be a trap. Making purchases on credit is a major part of everyday life to the point that it is being frequently abused and may be transformed into excessive unmanageable debt.
What is a debt
It is important to understand that even though the overall idea of debt is not something you may want, given that it increases your risk; there is ‘good’ and ‘bad’ debt. This differentiation between good and bad debt can help athletes utilize it when and where it best suits their overall financial plan.
Good Debt
Buy Assets
Good debt is the kind of debt which can be used to buy assets. This may range from investment loans which can provide high returns, loans for income-producing real estate, with real estate being rented out with the resulting revenue being used to repay the loan, to business loans for entrepreneurs looking to expand and grow their business.
Education
Moreover, education loans may also be considered examples of good debt, since according to statistics, individuals with college degrees tend to make more over a lifetime; usually around US$500,000 (depending on location) more than those without a higher education degree.
Bad Debt
Loans used for purchasing Depreciable or Consumable Items
On the other hand, bad debt refers to loans used to purchase depreciable or consumable items, such as travel tickets to go on vacation, clothes, cars, etc. For example, personal/consumer loans or bank overdrafts are an unwise investment, since they carry high interest rates and they usually cater for purchases which will not increase in value.
A real-life example of bad debt worth mentioning, is that of former NFL quarterback Vince Young, who filed for bankruptcy protection in 2014. It was said that even though he was facing financial difficulties he still took a high-interest, seven-figure loan for a $300,000 birthday party.
Credit card
Credit card debt is a form of bad debt due to high interest rates and finance charges, like consumer loans. A credit card debt can become good debt if you repay the full amount each month. Paying your credit card in full increases your credit score, avoids interest charges, and may earn bonus points for future purchases.
However, even loans for seemingly good investments can lead to financial issues if mishandled. Some bad debt is unavoidable, but it’s important to control the situation and plan for timely repayment. Managing debt requires discipline, self-control, and awareness, just like in sports, for a healthy financial life.
To begin, track your creditors, total debt, monthly instalments, interest, and due dates. An updated debt list helps you manage your financial obligations and understand your debt situation. Consistently paying your monthly instalments on time keeps you in control, avoiding late payments and extra charges, which can lead to difficult financial positions.
Create standing orders with your bank or use a calendar system to record instalment due dates and set reminders. Missing a payment isn’t catastrophic, as long as you catch up before the next instalment is due.
Consider the example of ex-NFL player Ryan Broyles, who had late payments and large bills on his credit report. After focusing on personal finance for self-improvement, Broyles made changes and paid off his debt. After signing a $3.6 million contract, he set up automatic payments for all bills.
What to do if you have debt
Additionally, make sure to pay at least the minimum monthly payment on your credit cards if you can’t afford more. This helps keep your account stable and prevents your debt from growing further, reducing the risk of default. Pay the minimum on all cards except the one with the highest interest rate.
Focus on paying down the card with the highest interest rate first to reduce your debt quickly. Once that card is paid off, move on to the next highest interest rate card and continue the process. Keep following this plan until all your credit cards are paid off.
This strategy will save you a significant amount of money in interest over time. By paying off the higher-interest cards first, you’ll minimize how much you spend in the long run.
High Interest rates
Highlighting the damage high interest rates can cause, it is important to look into the example of NHL player, Jack Johnson who earned more than $18 million during his nine-year career but filed for bankruptcy in 2014 after taking numerous risky loans at high interest rates on which he defaulted.
Prioritizing your debts
Prioritizing your debts is perhaps the most crucial part of the process. After thorough evaluation, you need to decide which debt is best to settle first. To be more specific, credit card debt has higher interest rates than other forms of debt and should therefore be prioritized. Prioritizing payments on the cards that have higher interest rates is a great move since they are the ones that can cause the most damage. Once you have the rates each credit card company charges, you can proceed and organize a payment structure, keeping the aforementioned in mind.
Bounce Back
Bouncing back from debt is possible with determination and the right strategies. Dorothy Hamill, an Olympic gold medalist, earned $1 million a year skating in prime-time TV specials during the 1980s. However, after excessive spending and poor financial advice, she filed for bankruptcy in 1996. To pay off her debt, Hamill toured the professional ice-skating circuit for several years, returned to television, and published her autobiography. She also partnered with vitamin brand Nature’s Bounty to promote health and wellness. Her determination, coupled with effective financial practices, helped her recover and build a $5 million net worth.
Conclusion
Overall, keeping debt under control is achievable with careful planning, discipline, and self-awareness. Being in debt is not the end, especially with the right knowledge and maturity to handle it strategically. We all make impulsive mistakes, but what matters is being aware of our actions and taking responsibility. Improving ourselves to avoid repeating mistakes is key to financial recovery.
The Money Smart Athlete® Blog is established and run by the Sports Financial Literacy Academy® (SFLA). Through its education programs the SFLA has the vision to financially educate and empower athletes of all ages to become better people, not just better athletes. For more information on our courses, our SFLA Approved Trainer Program®, and how they can benefit you and your clients, please get in touch with us at [email protected].