It is true that credit card debt is to be frown on, however, it is important to realise that not all debt is bad.
In fact, there are times where debt is an excellent instrument to fulfil your financial dreams and material needs.
Low interest loans to finance your house, new business, or your children’s tertiary education etc are all examples of good debt.
Many of the good things in life would not be possible if it were impossible to borrow money.
The key is to keep the interest rates low, preferably tax-deductible, and borrow funds only when the expected payoff is much higher than the cost of borrowing. A handful of my clients capitalized on the current low interest rate environment and started trading the Forex market with our trading algorithms. Now, they have not only paid off the debt, they are now trading with their own funds and established themselves streams of passive income for life.
Another example would be the use of a mortgage to finance your dream home even when you have the money to pay it off in full. By taking a mortgage loan from the bank for your house say at 2% per annum, you can keep the difference in a fund that pays you an annual average return of say 8% per annum. You net an interest differential of 6% per annum, and that’s a huge difference by any count.
Your current investment situation may be very different from what is being described above, but the concept is very real. This is how the rich will continue to get richer. No two way about it.
This is also a reason why the number of High Net Worth Individuals (HNWIs) in Singapore are on the increase year after year.
The good news is that this method is available to every person on earth and not just the HNWIs. You just need to know the right people who has the right experience to guide you on your wealth creation journey. Someone who has “been there, done that”. Just simply follow.
Like I always say. “You don’t need to be a rocket scientist to get rich and wealthy” and “If you can count one plus one equals two, you can be as rich as you want to be”. Period.
It is your birth right to be rich and wealthy. There is no virtue in poverty.
Another huge advantage in the above example is this. Real estate is illiquid in nature. Where there is a potential of capital gains over the long term, in the near term it is difficult to turn your house into cash in times of need. This is where your liquid investments come in to save the day.
Liquid investments can be turned into cash in your bank accounts in a matter of days. This is a risk mitigating factor that the rich uses to safeguard their wealth in case of any unforeseen emergency or to ride through the rough cycle that happens in the real estate universe from time to time.
To them, cash and streams of passive income are on top of their minds every time.
When Good debt turns Bad
It mentioned an increase in mortgagee sales due to increased interest rate.
What can we learn from them? How can the same good debt turn bad for them and not for the others?
There are many reasons for their plight, and I would like to share 3 of my personal insights here if I may.
- They were too optimistic about their financial future;
- They allowed their egos to do the purchase; and
- They were greedy.
Too Optimistic about the Financial Future
Most buyers buy on impulse. They don’t look deep into their financial future for any financial storm that may hit them. They are just too short-sighted. They think that their work income will continue and continue to grow with their employers forever. They don’t think that one day their jobs would be disrupted, or their employers leave Singapore for a greener pasture. They are just to eager to have their names on the Sales and Purchase Agreement.
They allowed their Egos to do the Purchase
In addition to buying on impulse, most buyers of big-ticket items allowed their egos to do the purchase decision. They tell themselves they are gonna be “there” with this house purchase. And they stretch themselves too much financially. Making themselves carry a financial burden that they can never afford in the first place.
They were Greedy
All real estate advisors and lenders will tell their potential buyers the potential high capital gains, high rental yield, and low interest rate environment from the purchase of a property. They are the bringer of “Good News”. Buyers who are greedy are blinded by greed. They went for bigger properties. They essentially bit off more than they can chew. They choke themselves up financially.
Debt is a Two-edged Sword
Yes. Debt is a two-edged sword. No matter how you look at it. It can serve you and it can kill you as well. We need to be very prudent and realistic with its use.
Thank you so much for reading this article of mine and I certainly hope it has enriched you.
CEO & Founder, AlgoInsights