Whether you’re applying for your first loan, or if you’ve had more than a few, it can always be a daunting process. That is why it’s important to go look for the best advice and tools to help us ease the process. We’re always looking for good advice in life. However, in every single area of our lives, there are those that provide us with the good and those that give absolutely bunk ‘advice’.
Perhaps you’ve come across these pieces of ‘advice’ on paying off your debt, they’re in fact, nonsense! You can’t afford following them:
1. Don’t worry about borrowing more than enough when you really need it
The “don’t worry” approach to borrowing discourages planning and properly considering your ability to afford repayments on your loan. This approach causes some to assume that everything will work out in the end. You should borrow enough to cover whatever expense you need to pay for, and not a cent more. Planning is essential.
2. Pay off all your debt before you start saving for retirement
Oftentimes you’ll hear this one, and it’s easy to see the logic if you’re looking at hefty interest rates. Tackling debt first can actually make sense, but only if you can do the job quickly or with a well thought out plan. But – if it’s going to take you a “lifetime” to pay off your debt, you’ll be forgoing many years of compounded growth on your investments. Rather talk to an independent financial advisor with a once-off fee to take the right approach.
3. You can borrow money and then invest it in an opportunity that will earn you high enough returns
You can borrow money for, say, 8% and then invest it and earn a 10% or 15% return. This is the logic that has caused many troubles for individuals in the past. It looks like a compelling proposition. But – it is not a good idea, it’s bad advice. Your debt repayment is guaranteed, but your investment isn’t, anything can happen in the markets, and you’d be left in a serious pickle.
So, let’s scrap the bad ‘advice’ and take a look at some good Debt Behaviour to live by:
1. Whatever item you finance should last longer than the life of the loan.
Fulfilling your lifelong dream to sunbathe on the beaches of Mauritius by charging it all on your credit card or applying for a loan is bad debt since you’ll be paying off that loan long after you’ve recovered from your sunburn.
2. Don’t be mastered by your wants.
Wants are infinite, this is an economic principle. Wants can be like a monkey riding on your back. Don’t give in, know what you need and are able to afford, and stick to it!
3. Know the difference between Good debt vs. Bad debt.
Is debt your friend or your foe? It depends on what you’re looking to finance. Don’t get confused between the two. Good debt, simply stated, can be for an investment that grows over time such as a rental property or business, they provide leverage. Bad debt generally refers to loans for items that lose value the minute you purchase them. Here is some great info for young people managing good debt vs bad debt.
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If you’ve been spending time here at Fincheck, you’ve been getting your fair share of healthy input, a toast to your financial future! Remember to keep an eye on your emails for some helpful tips to help you make some better financial decisions!