Debt is an amount of money borrowed by one party from another party. While it sounds neutral at first glance, the concept of debt suffers from popular culture painting it in a bad light. When the word debt comes to mind, images of loan sharks pouring red paint all over your door appear. Of course, being in debt can be a terrifying thing. However, is it always bad? It’s possible to live a life free of debt, but that puts you at a disadvantage. In this article, fundMyLife tells the difference between good and bad debt, and how being in good debt isn’t always bad.
Disclaimer: we may be named fundMyLife, but we can’t help you financially if you happen to be in debt. Sorry.
The best example of a good debt would be a student loan. Taking out a loan for your studies is generally a good kind of debt because income potential and employability are correlated with the amount of education a person has. As such, a student loan allows you to gain access to education that you would not have otherwise. The returns of student loan comes when your income increases due to an increase in education. Speaking of student loans, we wrote something on clearing your student loans.
However, having more education does not guarantee an increase in income. Not all kinds of education guarantees the same increase in pay after the graduation. As such, make sure you do your homework to ensure that you choose the right education to meet your salary expectation in the future.
In general, property value will appreciate over time. The only question is when and by how much. The simplest strategy is to own a home, live in it for a few decades and then sell it at (hopefully) a profit. Another way to approach real estate is to rent it and use the rent to offset the mortgage.
That said, if you happen to choose a bad property to purchase, it’s unlikely that its value will increase over time. In addition, price appreciation for property is no longer a 100% guarantee as well. Of course, it’s not that simple – real estate is constantly a hot topic in Singapore, and our friends over at DollarsAndSense wrote several pieces on real estate investment.
[Bonus info] Bonds
Companies and financial institutions raise money by issuing debt called bonds. These entities are borrowing money from those who purchase their bonds, with the promise of paying the interest and the principal once the bond matures. You might want to take note of this financial instrument. It is a good form of debt after all as companies get to raise money and you get to invest in a relatively low risk manner (depending on the bonds’ credit rating of course). FYI, we wrote something on why bonds are not a bad idea.
Bad debts are debts that you incur to purchase depreciating assets. In other words, it is a situation where you borrow money to buy an asset that loses its value over time. Bad debts are also debts that incur a large interest over time. Rule of thumb: if what you earn can only cover the interest rate and not the principal, you’re better off not borrowing.
Credit card debt ranks as one of the worst debts to have. It sounds amazing to charge your purchases onto a card, only needing to pay the amount at the end of the month. Without proper planning, strategy, and discipline, consumers often fall short of paying the full amount. In fact, consumers often pay a minimum on their credit card, causing the owed amount to snowball after a while. Keeping a balance on a credit card is a bad idea due to relatively high interest rates. On top of snowballing debt, missing payments on time results in poor credit rating which affects your loan applications in the future.
For those who are inclined to documenting their lives on social media, there is a pressure to ensure that their curated lives look as good as possible. Amongst this group, there are those to take it to the extremes by borrowing money to fund their vacations or weddings. In short, living beyond their means so that they can look good to others. While the vacation or wedding might be a dream, what awaits you when you come back to reality is a nightmare. For example, one couple spent $110,000 on their wedding which took four years to repay.
Another common example of a bad debt is a vehicle. As opposed to real estate, a vehicle’s value will decrease over time due to wear and tear. Being in debt over luxury cars like BMW is not worth it. Furthermore, if you lost the ability to service the loan, you’d end up selling the car anyways. If you have to get a new car, sleep over it and assess objectively if you really NEED it.
On the other hand, it’s a special case where the vehicle is a rare antique/collector’s item. Classic and vintage vehicle investing is an alternative form of investment…which is unfortunately still inaccessible to most people who want to invest in. So no, don’t get yourself too deeply in debt over a vehicle.
The mixture of adrenaline and chance makes gambling a compelling and addictive activity. In this case, the addition is literal and is a disease, according to Institute of Mental Health. While the occasional gamble is fun and best enjoyed with relatives during Chinese New Year, constant gambling often leads to financial ruin. Worse still is if you borrow money from unlicensed money lenders and loan sharks who charge very high interest rates. This keeps you perpetually chained to your gambling debt.
What if you find yourself in debt?
Being in debt is not so scary if you think about taking on debt as an opportunity to grow. If you find yourself in good debt, then the challenge is to organize your finances properly so that you can pay them on time and in full amount. Engaging a financial adviser to guide you along is a good idea.
However, what if you find yourself in bad debts? For unmanageable credit card debts, you can turn to Credit Counselling Singapore, a charity that provides credit counselling for those in debt, along with moral support and resources to be debt-free. On top of that, you can also consolidate all of your different debts into one single account. The lowered interest rate and structured repayment plan will hopefully help you manage your credit card debts better.
Ask fundMyLife financial questions today!
With this article, we hope that you have a peace of mind that being in debt is not always a bad thing. Owing an institution money can sometimes bring you further in your journey that not. That said, it is a calculated risk and sometimes you just need the right financial plan in your life. In this case, who better to bring you through it as a third part than a good financial adviser?
If you want to engage more financial advisers, or if you haven’t found the right one, why not consider advisers of fundMyLife? You can head on over to fundMyLife and ask our awesome financial advisers questions. Alternatively, you can check out our curated pool of individual advisers and ask them questions directly.
Been doing lots of research, but not sure who to engage to take the final step? Look no further! fundMyLife connects you to credible and incredible financial advisers privately and anonymously, based on the financial planning questions that you ask. We aim to empower Singaporeans to make financial decisions confidently.
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