Debt? Loan? Are they good or bad? Can taking on more debt make your life easier or harder?

Deciding over going into debt is not easy, especially when you’re at the start of your journey towards financial freedom. After all, isn’t it common wisdom to live your life debt-free?

The truth is that its not all bad with taking up debt, depending on whether this is good debt or bad debt. Taking on the right kind of debt can actually help you optimize your finances.

Find out more about using debt to reduce the burden of your finances!

#1: Reduce Pressure on your Cashflow Management

Managing your cash is always important for your financial journey ahead. From the myriads of bills that you have to pay and the numerous financial obligations you have, it is important that you have enough cash every month to pay for them.

Going into debt would mean that you have to incur interest but it prevents you from putting a substantial portion of your cash into a few financial obligations. This will leave you cash-strapped to pay some of your bills that affects you significantly in the short-term.

You would need to take into consideration the monthly essential expenses that you would have to incur such as:

  1. Food and Groceries
  2. Internet
  3. Phone Bill
  4. Petrol

Not having enough cash to pay for these necessary expenses is a hardship, leaving you unable to cope from month to month. Taking on debt in this case reduces the pressure on your current cash to pay for big items.

Preserving your cash is important for you to accommodate your monthly short term expenses but also for emergency purposes.

#2: Allows You to Weather Emergencies

There will always be unforeseen circumstances or emergencies that will require you to use your cash. From having medical emergencies for you and your family or a sudden need for cash, it is important that you conserve a sizeable amount of cash parked in your emergency fund to weather these situations.

Using debt in this case enables you to put aside more cash every month to fund your emergency fund. While you do incur interest from your debt, it is better to equip yourself to weather emergencies rather than locking up your cash in long-term commitments, leading to a situation where you have insufficient funds to cope with emergencies.

Perhaps you are thinking you don’t need a well-stocked emergency fund because you’ve spent a lot on insurance policies. Well, while you could (and should) spend on appropriate insurance plans to protect you and your family, you need to be aware that there are certain emergencies that are not covered by them such as:

  1. Massive water leaks that flood
  2. Gas explosion
  3. Main door breaking down
  4. Ceiling falling off
  5. Relatives or family member in need of emergency cash

Encountering these events would leave a huge dent in your finances. Not resolving them in the short term would leave you and your family vulnerable and would affect your short term standard of living.

#3: Enable You to Afford Your Home or Car Now

Many a times, you would not be able to put up the required cash to buy your home or your car in a single payment. After all, they cost a lot and you would still need to spend on your monthly expenses.

Buying a house these days is difficult and unaffordable as pointed out by the authorities. As house prices are just going to keep going up in the future, it will surely be more expensive down the line. Hence, it is important to go into debt and buy them now to “lock into” the price of the property you want. Of course, you would need to be prudent in ensuring that you can afford the repayment of the loan.

While buying a car has less future-proofing concerns compared to buying a home, it is still something that comes with a large price tag you may have difficulty paying in one go. In fact, it might even be prudent to not dump all your money into it all at once since cars would only depreciate in value throughout the years. However, unless you live in an area with a well-planned public transportation system, having a car could bring more value to your life as it could help you get to workplaces further from home.

#4: Obtain an Education That Might Lead to a Better Job

Education is becoming more and more expensive these days. You would have surely considered furthering your education in either getting your degree or masters but find them very expensive. Putting up the money upfront for your education makes you vulnerable to any need for cash in the short term.

You can consider taking up an education loan for yourself either through PTPTN or other kinds of education loans. This way, you can actually improve your own skillsets and education and could stand to land a higher paying job in the future.

This of course assumes that you are taking a degree or masters that significantly improves your job prospects. For example, if you are paying an interest of 3.0% for your education loan but you get a pay raise of 10.0% after you completed it. That will be worth taking the loan. However, if you take an unrelated degree or major and only gain about 3.0% in pay raise, it might not be worthwhile in that case.

The main point here is that you are taking on debt to significantly improve your job prospects in the future that can repay your loan interests. You will be better off that way in the long run.

#5: Build up Your Credit Score and History

In today’s world where every data is collected, measured and analysed, it is important for you to build up your credit score and history in the financial system. This will determine whether you will get approved for additional loans and financial institutions can evaluate whether you are being timely and prudent with your repayments.

It’s best to be visible in the financial system if you are a good payer and it opens up further financing for yourself. You can definitely check up on what is a credit score and why is it important here.

Remember that with a good credit score, in times of emergency, the likelihood of you getting approved for a loan that could help weather them is higher. That way, not only can you rely on your emergency savings, you can also depend on emergency loans to help you out.

Going into debt is not always the worse thing then, if it grants you better visibility on your financial situation from the bank’s perspective. After all, you don’t want to be rejected on the basis that the bank lacks information on you.

#6: Use Your Hard Earned Cash to Generate Higher Returns Instead

Exactly what it sounds like, instead of putting all your cash into long term illiquid investments and assets, take on some debt and invest your cash in other investments. The principle here is to invest in assets that generates higher returns than your interest on the loans.

For example, if the interest in your debt is 5%, you can invest in assets that generate a higher return such as equities and bonds that gives slightly higher returns. That way, you are not wasting your current cash in assets such as housing and car upfront and putting them to good use.

Better yet, if you do not want to do extensive research into the type of investments you need, you can procure the services of robo-advisors. They will help you invest your cash into investments that suit your preferences and style. Going into debt frees up your cashflows to invest in higher-yielding assets and ensure that you are optimizing your finances.

Conclusion

Going into debt might not be the worse thing for your finances contrary to popular opinion. It can reduce the pressure on your cashflow, allow you to weather emergencies and also afford your house and car. It can also enable you to invest in further education to get higher income, build up your credit score and history, and use your hard earned cash to generate higher returns for yourself.

 

Let us know in the comments below on what you think about going into debt!

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