When you hear the word ‘debt’, what normally comes to mind? A lot of people, myself included, associate debt with anxiety. Why anxiety? Well the way I see it, debt means being tied down. It’s when you give up a degree of financial freedom in exchange for something else. Being in debt means I have to commit my income to pay for something over a period of time. There’s a catch, if you miss enough of these payments, you could get up in a heap of trouble! Your stuff could be taken away, and worst of all, you could end up…BANKRUPT!
But should we be that scared of debt? Is it that bad?
Despite saying that I associate debt with anxiety, I think that debt is also a wondrous creation on its own.
Hear me out.
Debt can be good
In an ideal world, it’d be nice to be able to buy everything outright. Put the cash on the table and walk away with, say a car, just like that. But a lot of things cost way too much for many of us to pay it all upfront. Cash-flow wise, it might make more sense to pay for something in instalments, as opposed to taking out a chunk of your savings in one sweep. Taking out debt gives you the option to buy something now that you would not have been able to afford outright.
An example would be, buying a house. If you can fork out half a million ringgit to buy a house, without putting yourself under financial stress, all the power to you! But if you’re like most people, you probably can’t. So, to be able to buy a house, you take out a mortgage (which literally means “dead pledge*”, not helping, I know) and pay it off over several years.
Sure, with debt you’d end up paying more than if you had paid everything in cash. However, with debt, you’d be able to spread the payment to an amount more palatable for your cash-flow. Being able to manage your cash-flow is really important in ensuring a (relatively) stress free life.
Asides from enabling stuff you won’t have access to without, debt can be good if used for investments. This is of course provided that the investment you make makes returns higher than the interest rate the bank charges. For example, say you take out a loan to buy a food-truck. Imagine that monthly you have to pay RM500 as instalment, and you generate RM1,000 from your business (I’m going to assume no other overheads for now, for simplicity). Here, you’re using a loan to generate more money, and that’s a good thing. Another example is of course if you used the loan to invest in ASB. In this example, at the end of the tenure, you could end up making more than you paid in total, also a good thing.
Debt can also be a bad thing
Taking on debt can also be a double-edge sword. Barring any unfortunate events, taking up loans in a well planned budget should be good. Otherwise, taking on debt could do you a lot of harm.
I mentioned earlier that getting into debt locks up a chunk of your income as a commitment. For example when taking up a mortgage, it’s important to take note of other costs that could pop up (read more here). Not taking these things into your budget planning may put you under a lot of financial stress. Since there is usually no way around not paying your debt on time, you have to be ready for such commitments, and prepare reserves in case some unexpected expenses show up.
Debt can also be bad when you over-indulge yourself. Sure, once in a while, reward yourself with something nice. It feels good to be impulsive occasionally. But be sure to rein it in, don’t be too trigger happy with your credit card. Being in debt is like borrowing from your future self. With a credit card, you risk borrowing at an insane rate of 18% per annum. So if you borrow excessively, with Mastercard, everything is priceless, until it’s time to pay. Paying the minimum amount won’t cut it, because of the compounding effect of the interest rate charged, your debt can balloon really fast.
I’m not just talking about credit cards here either. Occasionally during festive seasons, you get offers for personal loans. They entice you with slogans like, “let us help you buy new furniture for (insert celebration here)”. Sure, it would be nice to change furniture every year, but here’s what I do when I get itchy about taking the offer and heading down to Ikea.
I ask myself these few questions:
Do I need new furniture?
Can I afford the instalments, or am I close to tipping over?
If I need the furniture, cool. If I’m doing it because I want people to marvel at my new furniture, not cool. I’m over 30, so I really don’t need validation of my interior design skills. But if I’m buying because, hey, I want my place to look a little nicer
I can do so without putting my monthly budget out of whack, then maybe, maybe I’ll consider it.
But most likely, I won’t. Why? Simply because I think that these kinds of loans (which I will call vanity loans), aren’t productive loans. They make me feel good, but in the long run, the things I buy will lose its value. Asides from the short term happiness that I get, I get nothing else. Sure, a car loan is the same, a car loses value the minute you drive out of the showroom, true. But, a car, if I buy for utility, rather than vanity, has value as it gets me to places I need to go.
So I would say, for things that are nice, but unnecessary, don’t get yourself locked down. You may find that you need that extra space in your budget for other things, but you’ve used it up to buy things that maybe you could do without. And that’s a bad thing.
The long short
All in all, getting into debt, for the right reasons can be a good thing. Debt allows you to buy things that would have required large amounts of money, by breaking it down into smaller and more palatable instalments. Debt lets you get into investments that you may not have been able to afford on your own.
But debt can also be a bad thing. If you’ve stretched yourself too much, you won’t have any wiggle room in case you need funds for anything else. Debt can creep up if you’re not careful, because demand for payment can come in later, your early enjoyment could be short lived. Before long, because you chased short term pleasure, you could be setting yourself up to long term pain.
Be wise, take on debt when necessary, don’t overindulge yourself too much, and try to utilise your credit card only for emergencies. If you can think about getting insurance (definitely a post for another day).
Debt can be good, debt can be bad, and if not properly managed, debt can get real ugly.
What do you reckon? Do you have any other debt advice? Do you think debt is good, or bad? Let us know! Comment down below!
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*If you wanted to know, the word ‘mortgage’ means ‘dead pledge’, meaning that the pledge ‘dies’ when the debt is paid or if payment towards the debt fails. It doesn’t mean a pledge you hold ’til your death (well it could, if you’re feeling morbid). Source here.