If you owe money to a bank or finance house and pay interest every month you are in debt, no matter which way the loan is structured. All debt is not equal however and understanding the differences may help you to get the interest monster off your back, once and for all.

There are basically two types of debt; long term such as a car loan or a home bond and short term such a credit cards and retail accounts.

Long term debt = ‘good’ debt
While it is advisable to shed all types of loans as quickly as possible, few of us could get through life without ever having to rely on a bank loan.

It is very difficult, for example, to save enough money to buy a house if you have already left home and are paying monthly rent. So this kind of long-term debt could be described as 'good'. Generally speaking 'good debt' is used to finance personal or family growth that will ultimately yield a return or increase your ability to earn money.

The money you borrow to buy a house at least goes towards something that will theoretically increase in value. So the interest charges are partially, if not totally, offset by the growth in the asset.

The problem is that the average South African moves every five to seven years and does not attempt to pay off the capital portion of their home loan. This means that they keep paying interest without accumulating growth. In general, to realise a net gain in a property you have to live in it for at least 10 years and try to pay off the bond over that time.

While long term debt can help you to reach lifestyle objectives, you don't have to spend half of your life paying it back. The reason most of us take 20-year bonds is because that payment is all we can afford. If we cleared our short-term debt we would be able to pay off our homes in 10 years or less. The same applies to the purchase of a car.

Short term debt = 'bad' debt
Short-term debt consists of credit cards, store credit cards, bank overdrafts and micro loans. This type of credit is very expensive and is the major reason why many South Africans are struggling to get ahead financially. Over the last 20 years society’s perception of debt has changed dramatically and there is no longer a negative stigma attached to owing money.

In the good old days people bought assets — not consumables — with the money they borrowed. Nowadays we often finance items that have no intrinsic value; we buy exotic holidays, designer clothes and even designer food on credit. The interest charges hang around long after the tans have faded and worrying about the payments often undoes the relaxing effects of the holiday.

So, in other words, bad debt is when you borrow money to pay for items that do not increase in value or help you earn more income. This kind of 'bad debt' is costing many South Africans their retirement. The statistics support this trend: ten years ago we were spending 47 percent of our income on debt. Now it is 60 percent and has been as high as 70 percent.

All about interest
The reason borrowing has decreased in the last few years is because at the end of 1998 the sky-rocketing interest rates gave credit happy consumers the fright of their lives.

Those that were caught in the upward spiral suddenly had to find between R500 and R5000 extra each month from their already tight budgets. Some lost their homes, some sold their jewellery and others managed to hang on until the reprieve in the second half of 1999. South Africans slowed down their use of short-term credit until they caught their breath. But will they have short-term memories?

You don't have to accept the lifelong debt sentence. Break the mould and aim to become debt free (that includes your house) within the next five to 10 years. This will give you an excellent opportunity to save additional funds for your retirement.

If you need an incentive, consider this: if your bond is currently costing you R2000 per month and you were able to invest that money (at a growth rate of 10 percent) instead of paying it to the bank, in 20 years you will have accumulated an incredible R1.5-million.

So change you views, plan to get out of debt forever and become an owner not a loaner.