Whether we like it or not, debt is a part of our financial profiles in some form.
Moreover, if it is managed with care and prudence, it can be an effective means of accumulating wealth.
For instance, a bank loan may be used to acquire an asset.
A resource of economic worth whose productive usage creates income. Real estate investment is one example.
Consequently, investing in income-producing property can be a wise decision.
If you are already a homeowner, your home equity is the value of your property.
Your part of the property’s value can help you purchase a second home.
This time, you may not be required to make a deposit equal to your initial investment.
If the rental market is flourishing and your renters pay you more than you owe on the loan, you will have positive cash flow.
Once municipal taxes and property management costs are accounted for, the wealth-building machine will begin to function.
But debt makes many people uncomfortable.
A person earning R20,000 per month in South Africa devotes an average of 63% of their income to repaying unsecured debt, such as credit cards, personal loans, overdrafts, and “buy now, pay later” options.
As a general rule, you should not spend more than 40 percent of your income on debt payments.
Also see: four methods to avoid weight gain
Financial worry stems from a number of myths. The foremost being that all debt is negative. This is false.
Borrowing judiciously to acquire an asset might help accumulate wealth over the medium to long term.
Therefore, debt anxieties must be evaluated against a broader comprehension of wealth increase.
Debt management can contribute to this process.
Here are the four most common myths around debt. Recognizing them will allow you to design a more comprehensive debt strategy.
THE MISCONCEPTIONS
ALL DEBT IS BAD DEBT.
Debt becomes an issue when you can no longer control it and it begins to control you.
Leverage is one of the simplest methods to determine if debt is working for or against you.
This refers to the practice of using debt to acquire an item that is more valuable than the loan itself.
Positive leverage is also known as favorable leverage.
People who obtain unsecured loans for consumption-related purposes leverage unfavorably.
Frequently, there is nothing to show for one’s expenditures.
Unsecured loans typically carry a higher rate of interest to compensate for the absence of collateral.
Only financially irresponsible individuals are in debt.
This is the subsequent fallacy.
The majority of South African consumer debt portfolios are comprised of home loans, second only to unsecured loans.
The most practical means of entering the home market is through a mortgage.
If you pay off your mortgage in a fair amount of time, you are acting appropriately.
This will result in the property’s long-term value exceeding the amount of the mortgage debt used to purchase it.
But there are two specific mortgage-related misunderstandings.
After paying the mortgage deposit, there will be no additional costs.
This is not accurate. There is a fee associated with opening and closing a home loan account.
There may also be a penalty for prepayment of a mortgage.
Be sure to read the fine print on cancellation fees and closing costs.
If you adhere to the mortgage payment amount, you will be able to repay the loan quickly.
Even if interest rates fall and your mortgage payments decrease, this is not true.
Your mortgage loan length is probably between 20 and 30 years.
Numerous institutions may estimate a monthly mortgage payment that appears inexpensive at first glance, but is actually based on a 20-year term.
Banks are companies, thus it benefits them if you wait longer to repay your mortgage, as this results in greater interest payments.
The longer the period of the mortgage loan, the greater the interest you pay and the greater their profit margin.
If it takes longer than 20 years to repay a bond, the value of the interest payments typically surpasses the principal loan amount.
House loan calculators are a valuable tool for determining how much you may afford to repay on a home loan based on the amount of your down payment.
If interest rates fluctuate and the length of time it will take to repay the mortgage with supplemental payments.
It is crucial to have a goal and a plan for when you will pay off your mortgage.
If you do not take action, you may become a mortgage prisoner.
Also see: ways to prevent workplace burnout
KEEPING YOUR EYE ON THE PRIZE
As we approach the end of the year and into the holiday season
It’s an excellent moment to recall your financial objectives and avoid unintentionally swiping or pressing your credit card.
“Janu-worry” is approaching, along with the accompanying financial anxiety.
However, this need not be the case. Debt can be either the cause or the solution to your financial situation.
Reconsider spending patterns that need credit card usage.
An irregular spending pattern characterized by a high level of debt over a short period of time is a warning flag.
If the alternative requires you to waste your hard-earned salary on servicing consumption-driven debt, there is no harm in purchasing only what you can afford or staying in your financial lane.
Debt is an integral element of our financial portfolios, for better or worse.
»Debt can aid in the creation of lasting prosperity«