Is it good to be in debt or it’s a total nightmare? What kind of debt do a person can have and what type of debt should a person must avoid totally … Are all the debts behave the same?
I have come across on 2 different term for debts .. a good debt and a bad debt ….. do debt really exists with such a behaviour, good or bad ?
If it so …which debt is good? Is housing loan a good debt? Any loan pertaining to wealth building, such as property buying, gold investment or unit trust investment can be categorized a good debt?
Is buying a car consider a bad debt? Is buying a expansive Tag Heuer watch with your credit card consider a bad debt even though you are effort to pay the minimum payment every month ….
Too much confusion here ….. Let me share you an illustration of a life story, which I read from an article of a friend some years ago ….
Disclamation: - The name appeared on the below example are not from those who still leaves or death. The usages of the names are sole purpose of examples for financial education purpose only. .. ha ha ha ….
There are 2 good friends in their late 40’s … Mr. Washington Vetrivel (WV) & Mr. Chicago Saktivel (CS), their understanding of debts are totally different.
Mr Washington Vetrivel believes that debt must be totally avoid no matter it’s a good debt or bad debt, thus, he is avoiding all kind of debt and likes to pay in cash for all its expanses. He is a well renowned architect earning a 5 figure pay every month. His property (double storey semi-D house) is bought by using its hard earn cash. His spouse is a teacher working at a private school earning 5k a month. They have 2 children currently pursuing their tertiary study abroad. All the expanses for their studies were paid by their parent’s cash and this leads the couple to save less money from their monthly income. Life goes on smoothly until one misfortune day where Mr. WV has a stroke and paralyzed half of his body. This force the employer ‘retired’ Mr. WV with a small compensation payout. Since the family loss their main source of income, the wife is currently running the family with her pay added up with the compensation money from her husband company. Few months have pass though, but, Mr. WV have no sign of improvement and the family is in financial crisis now, they have no enough cash to fund their children education overseas, thus, now the wife already desperate to sell the house well below the market value, yet they find it difficult to sell the house or re-finance the house due to their age limit and limited source of income. This of course interrupt their children education abroad.
Mr Chicago Saktivel who is also a renowned architect, earns 5 figure pay a month, believes that good debt is actually can help in long run. So, he bought his property ( a double storey semi-D ) with a bank housing loan with a MRTA ( Mortgage Reducing Term Assurance ) and conservative enough to save the balance to purchase another shop house ( on loan ) for the purpose of rental with a MRTA of course. Further he continues to regularly save his income in few investment tools such as unit trust and share market. His wife, also a teacher in a private school earning 5k a month have 2 children studying abroad. Mr. CS also takes up an education loan for the children and pay them slowly till the children complete the study, which of course he spend a little money to buy the MRTA. Life goes on well, till the same misfortunate day where he suffers from a stroke and paralyzed half of his body. He cannot continue his current job and loss the main source of income. With a same small compensation from his company, he his forced to rest at home. Now, the after effect of Mr. CS stroke is different, since almost all his loan is good debt, the MRTA fully paid his house, shop house and his children’s education loans leaves no burden to his wife to run the family. With the dividend returns from his share market, unit trust and rental income, he is still able to run his family happily without any disturbance for his children education and future.
Now, base on the 2 illustration above, which category do you want to be? Are you wants to be a debt free or otherwise?
Being in debt is not the end of the world, some debts can actually helps us in the most wanted time, such as the above Mr. Chicago Saktivel’s illustration. The main killer is the bad debts, such as over spend on credit cards or personal loans are actually pull down your overall net worth.
It’s good to think twice before every use of the credit card; do I really need to purchase this item? Is it a need or wants? Can I survive without the item I intend to purchase another month? Can I pay back the credit I use by end of the month in full?
Answer the entire question by your self and evaluate your answer logically before you ever swab the credit card at the cash counter …..
