Debt is bad except if it's not

Good debt. Bad debt. Do you know the difference? More to the point, does your teenager? It is never too soon - or too late - to learn.

Illustration by Gary Clement for The National

Good debt. Bad debt. Do you know the difference? More to the point, does your teenager?

When I was a teenager, I have to say that I didn't know the difference between the two. That's not to say that I was a Luddite, it was just that back then there wasn't much in the way of complex financial products out there.

No bank competing for your hard-earned dirhams with their free-for-life, but oh-so-high-interest credit cards; no bank tempting you with an iPad or other giveaways if you wanted a high-interest personal loan for your next holiday or shopping spree.

My parents were conservative when it came to money. They had a mortgage and a credit card for emergencies. And that was about it. So back then, there wasn't a great deal to teach me about how to handle my personal finances aside from the basics.

My father was a strictly one-third man: one third of your salary for day-to-day living, one third for your rent/mortgage and one third for saving. He had a pretty good retirement fund, a life insurance policy, a will and solid savings.

It was an uncomplicated financial planning strategy, but one that was effective back then - and not bad for a man with five children and a wife to support.

In those days, I had a part-time job and was earning just A$8 (Dh29.50 at today's rate) in return for four hours a week of washing dishes in a Chinese restaurant.

Just to qualify: I was 14. It was the worst job of my life, but I did learn a few lessons from it: knowing the satisfaction of saving up for something and the importance of putting away my money for a rainy day. And that I never wanted to wash another dish in my life. But that's another story.

Fast-forward to the present and the financial life of a teenager has transformed into a complicated saga that is driven by a number of factors: peer pressure, easy access to money and credit, especially in the UAE, and little, if any, understanding of financial literacy.

Which brings me to an interesting, very encouraging debate I attended last week that was organised by the Emirates Foundation for Youth Development, which has made the understanding of smart money management among young Emiratis a priority.

The global financial crisis has ensured that there's never been a more vital time than now to manage our personal finances in a responsible manner. Many adults know that, although some have yet to put it into practice for various reasons and are perhaps also neglecting to teach their children just how important it is to grow into fiscally responsible adults.

And as the push in the UAE for financial literacy programmes gains hold, Emirates Foundation, led by its charismatic chief executive Clare Woodcraft, has decided that it's time for the country's youth to also start understanding what it entails.

Although the initiative is in its early stages, there are some alarming statistics out there. And while they are not as up to date as they could be, they are a good indicator that many Emirati youths lack the basics when it comes to financial literacy.

According to an Arab youth survey conducted in 2010 by Asda'a Burston-Marsteller, 70 per cent of young Emiratis are in debt. Of that total, personal loans accounted for 21 per cent, bank loans 35 per cent, credit cards 30 per cent and student loans 14 per cent.

Can you pick the good and bad debts in that list? A personal loan equals bad debt, as do other bank loans (unless it's a mortgage) and credit cards. The only debt that could be considered good is a student loan - and only if it's being used to pay for education.

Here's another one. According to Nielsen Next: Understanding Youth in the UAE, 2011, Emirati youths spend as much as three times more than their expatriate Arab and Asian counterparts.

I wrote about this study in my column in April last year. It found that Emirati youths have an average monthly household income of Dh13,500 (US$3,675), almost double that of expatriate Arabs at Dh7,800 and considerably more than the Dh6,200 Asian expat youth have.

Like all youth the world over, young Emiratis face similar challenges when it comes to managing their personal finances. The debate, however, was focused on finding partners and workable, long-term solutions to an issue that has far-reaching consequences in a world that is teetering on the economic edge.

It's also not about blame, although I'm a firm believer in the multi-pronged approach: parents, schools and financial institutions must step up to the plate and work together to teach all children financial literacy.

During the debate, a few solutions were suggested from the floor, including one novel idea: educating bank staff to explain to customers what debt is, rather than just selling them a high-interest loan or credit card that comes with a few so-called perks, such as bonus air miles, a free gadget or whatever.

Probably the biggest challenge the initiative faces is introducing behavioural change, not just for the spending habits of Emirati youths, but also how they manage their finances, as well as eliminating that frustrating teen angst known universally as peer pressure.

But if there's one thing going for the UAE, it has to be its ability to make something happen once it sets its mind to it.

"We should be able to get something scalable up and running quite quickly," says Ms Woodcraft. "And you have also a very strong community structure that will no doubt be very helpful; really providing guidance and support. You should be able to have some structural shift in the way people finance themselves."

And just for the record, good debt is asset-linked (such as a home) and bad debt is consumption-linked (such as using your credit card to fund a holiday). Tell that to your kids.