WE all know that debt in itself is not a bad thing, but it depends on what is it used for. In business, it would make sense to borrow money to spend on a project or a new venture if the rate of return is higher than the cost of the debt. Otherwise, it would be a losing proposition. However, there could be other nonprofit-driven motivation to borrow money, such as in the case of emergencies.
As for consumer debt, one might think that it is alway a losing proposition that has no return. While this may be true in numerous cases, certain purchases may have an upside potential either due to capital appreciation, revenue generation or cost reduction. As an example of capital appreciation, the purchase of a house where you can live with your family may seem like a burdensome investment. However, historically, real-estate investments have provided one of the best returns. So while you may have to borrow to be able to afford your house or condo and pay the corresponding interest, your capital gains over time should be more than enough to make up for that and other expenses.
The purchase of your own vehicle may seem like an unnecessary luxury and additional costs for operating expenses, maintenance, toll fees, registration and will not likely to provide you a capital gain. Again, it may end up as a burden to you, but consider the possibility of generating revenues from your car by using it in Uber or Grab, or using it as a mobility tool for you to move around and improve your chances of getting promoted in your job or to use in your small business.
On the other side of the equation, we now look at situations of borrowing money to make purchases that have no upside potential. Typically, these would entail borrowing money to make purchases simply for consumption. The borrowing that I am talking about is when you make a loan or advance and you are charged an interest for it. These would include credit-card outstanding balances, employee loans, bank loans, borrowing from the pawnshop and the like. What I would consider nonreturn purchases includes buying your regular brew from your regular coffee shop, shopping for clothes, appliances, cosmetics and other personal products.
While I have nothing against making purchases of products that make you feel and look good, you need to consider if you need to borrow money to make these purchases. The long-term effect of debt will limit your ability to sustain purchases of consumer goods that you like. Why is that? Simple, because most of the money you make will be used to pay the debt that you have built up. You have to watch out for the actual cost to you.
Think about it, when you use your credit card, you don’t have to pay the full amount due. Most of the time you need to pay only a very small amount, typically just enough to cover the interest. But things can get out of hand very quickly. Imagine if you got your brand-new credit card and decided to break it in. In your first month you decide to spend P10,000 and let us, assuming that you can keep on building up your outstanding amount by P10,000 a month and the interest rate is 3 percent per month.
In the first month, your interest expense is only P300, which become P600 in the second month and, by the time you are at the 12th month, your monthly interest expense is already P3,600! While it may have made things easy for you at the start, it does not take too long before your dream becomes a nightmare. Was the purchase actually worth it or could you have done without? All successful people are willing to make a sacrifice so that their long-term goals can be achieved. It requires a lot of discipline and rational thinking but if that does not work, remember the burden of debt, before you whip out that credit card!
Comments may be sent to georgechuaph@yahoo.com.
1 comment
Well, if you ask me, the most critical part of structuring your finances and optimizing savings is just having a plan. You have to get everything out in front of you so you can make smarter decisions. Once you do that, then implementing your disciplined savings strategy becomes critical.
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