“Debt is a dirty word. Try to get away from it as much as possible ”. Have you ever heard this before? Well, you are not alone. Yet, contrary to common theory, debt is not always a bad thing. In fact, debt may well mean development. You just have to change your mindset on Why you use it, so the “how” to use it properly becomes simpler.
The importance of financial literacy
In case you are reading this and wondering why you aren’t more tuned into the ‘how to’ of debt, let me assure you that’s not your case – it’s’ us. “. And when I say “we”, I mean the Australians.
The basics of financial literacy aren’t taught in schools, yet money makes the world go round. As a nation, our basic financial literacy is actually relatively low. According to a study conducted by the Melbourne Institute of Applied Economic and Social Research’s Household, Income and Labor Dynamics in Australia (HILDA) survey, less than 50% of Australians surveyed could correctly answer the five basic financial questions they were asked.
When I was a financial advisor, I saw countless clients who had accumulated $ 20,000, $ 30,000 and even over $ 100,000 in credit card debt combined on multiple accounts. Our lack of education about money slows our progress, and if you’re not careful, you too could accumulate debt that will start to drain your money unnecessarily.
What is the difference between “smart debt” and “regular” debt?
Despite some horror stories you may hear, debt is essential for growth.
How? ‘Or’ What?
Because by using debt, you unlock the ability to move your future forward – to create something out of nothing.
Want to buy a house but don’t have all the money you need? Debt can help you make that purchase.
Want to invest in education, but don’t have thousands of dollars aside? Again, debt can be your answer. While this may sound controversial, it is the mindset of the wealthy and governments that use debt as fuel to finance growth.
The mindset shift you need to make is this: Debt is an essential ingredient of wealth, when used the right way. When you borrow money to buy an asset, such as a property, you can benefit from that asset immediately and also experience the increase in the value of that asset, in exchange for a premium (the interest you pay on the loan).
The smart way to make money using debt is to make sure that the value of your asset is more than the premium you pay for it. A safer way to do this is to have the asset provide you with income as well as capital growth, such as rent or dividends, which allows you to cover your “debt premium” (payback). interest) and always have money to cover the Capital.
Education is a good example of smart debt. Taking out a loan for a diploma or specialized training puts you in great debt, but since it has the potential to increase your future income while enjoying a low interest rate compared to other loans, you can transform that debt. ordinary into smart debt.
Having a degree gives you an edge in a highly competitive job market, giving you the opportunity to increase your future income while enjoying a low interest rate compared to other types of debt.
On the other hand, ordinary debt like taking on credit card debt for vacations or shopping can get ugly quickly. This will give you a high effect like a good cup of coffee, but with the unfortunate accident of having to pay back the money – with an interest bill attached.
Do your research
Along with understanding the difference between smart debt and regular debt, it’s also important to educate yourself and do your own research.
For example, when applying for a mortgage, the bank will set up your recommended repayment plan, which will often allow you to pay off the loan with affordable monthly payments over a period of up to 30 years.
If you do exactly what the bank tells you without digging into the facts, you could end up paying as much as the loan itself in interest. But did you know that paying off your loan every two weeks rather than once a month can save you thousands of dollars in interest payments? And did you know that negotiating and refinancing your loan regularly will also help keep costs down?
Always do your research, know the facts, figure out what you can afford and how that will affect the amount of interest you have to pay back on your own – it’s literally worth doing.
Using debt for development
Debt (when used correctly) can be a powerful tool for your personal, financial, and professional development. If you develop and use your financial literacy and financial intelligence, you can begin to see how you can use debt to your advantage and create smart debt that works for you.
Here is an example of how to do it:
Taking out a loan for an investment property will entail significant debt. However, it also comes with a host of benefits including: tax efficiency, income earned on the property that will help you with repayments as well as the benefits of negative debt.
Taking out a loan on investment property won’t tie up a lot of your income, in fact, it will actually allow you to diversify your income. Because much of it is unused, you can use the money to invest in other things simultaneously (like stocks) without having to wait 30 years to do so. You will end up with two different baskets of wealth created for you simultaneously rather than one after the other.
You also have the option of speeding up your debt repayment by adding your rental income and making additional repayments to the loan. This can have a major impact on the life of your mortgage and the interest you save.
For example, suppose you take out a loan of $ 400,000 over 30 years and pay it off at $ 2,039 per month. Over the life of the loan, you will spend $ 733,912 in total repayments and pay $ 333,912 in interest.
However, let’s say you change that to bi-monthly repayments and add an additional $ 700 bi-weekly from your rental income. Over the life of the loan, you will now spend $ 521,946 on total loan repayments and you will have to pay $ 121,946 in interest. It’s almost a quarter of a million dollars less!
So the next time someone advises you not to get into debt, start the conversation about accessing smart debt. You will likely enrich someone else’s mind as you work on your future wealth.
For all women who wish to continue to develop their financial literacy, as well as their leadership skills, career, self-awareness and more, then get on the waiting list to join the Woman’s Signature Membership. remarkable!
Shivani Gopal is the founder and CEO of The remarkable woman; a mentoring and leadership platform for women.
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