It is said that “Debt is the worst poverty”
Not sure if the above statement stands true, may be yes, may be no! Two sides of a coin.
Debt is a very crucial part of Personal Finance. It is important to know how people who understand it perceive it. However, the ones who do not, keep falling in a debt trap…
What is Debt?
At its simplest, debt is defined as money owed by one party to another. But it can get complicated fast. Depending on your circumstances, debt can be a useful financial tool or baggage complicating your life.
Surely, there are various types/concepts in the entire chapter of debt and one can talk about it for not sure how many hours, but the very basic question that I still do not find a firm answer for is, how important a debt really is? Also, how much?
The thing with debt is we can spend more than we could normally do, but what we spend on, makes all the difference.
Should one borrow?
Borrowing has surely helped some of the major corporations and also people to be where they are. Building up on the right leverage requires one to look down internally and then decide on the exposure that needs to be taken.
Having Debt to create more wealth, buying assets and investments surely drives a smarter and a successful long term financial plan.
To look at the grounds, I guess the type of debt we take on, along with its quantity and cost, can mean the difference between a good debt and bad debt. Not only for the corporates, but also personally, debt taken to create another debt can be one of the stupidest things done by anybody in the course of financial planning.
In the current scenario, where spending has increased due to the financial products offered/promoted in the market, if not used wisely, we are just creating a liability for the future years.
However, it appears that the industry always wants you to be under consumer debt - credit cards, huge wedding, 30-year mortgage, car payment and the list goes on.
Look at the graph that below provides the Country-wise Household debt for FY21:
Does borrowing really help in creating wealth?
It can lead to a wise decision if you borrow to invest in growing assets which could be a powerful means to build wealth overtime as it enables you to purchase more investments than would be otherwise possible. The goal is basically to create wealth by spending and borrowing effectively.
If your investments increase in value over time, gearing can generate a higher overall return, after the interest and other costs associated with the debt have been factored in.
If your major borrowings do not yield you returns, guess it’s time to pay them off, as one of the roads to financial freedom is being able to use your own money without worrying about the cost of using it.
These are just some of my views/questions/learnings on the much wider concept of Debt. Do share your views or even personal experiences of debt that have helped you either increase your wealth or learn in life