Debt can assist your journey to Financial Freedom as well as block the path, there are two types of debt, good debt and bad debt. Good debt is used to purchase assets which have the potential to grow in value and produce income, an example of these would be Real Estate and Shares. Bad debt is used to purchase consumer items such as Holidays, Cars, Clothes, TV’s, at the end of the day these will have no value.
Debt Paralysis
Debt can paralyse your journey to Financial Freedom if your debt is the wrong type or you have taken on too much debt. There is a tendency to take on too much debt to keep up with the joneses. The big house, New car, Sports club memberships, bragging rights etc, all funded with excess debt which takes a larger percentage of your income to service.
If you reduce the size of these items you can redirect debt into income producing assets or have a facility to take advantage of opportunities as they arise. If you are fully committed you can’t take advantage, opportunities to make money will pass you buy. This is one reason people say the rich keep getting richer.
Even worse, your circumstances change. The loss of your job or illness hits, if you are living from pay day to pay day because of debt, you may find yourself in a with some very hard choices to make. Trust me, these will not be financially beneficial to you and your family.
Low Rates
Low interest rates can be a green light to load up on the wrong type of debt. Look how low the rates are! we can now increase our home loan to get a more expensive car or move to that suburb where my boss lives. Aspiration is not a bad thing but it needs to be funded with proportionate income increases not just increases in debt.
Credit Cards
Store Card and Credit Card debt are traps people fall into because they are convenient and relative easy to access. If you do not pay the cards off within the interest free period you will pay extreme rates of interest compared to other types of debt.
Government Debt
In our opinion Governments around the world are in a debt trap, they have spent money they don’t have and funded the spending by issuing debt. There is a co-ordinated effort by central banks worldwide to force interest rates down to record lows. The reason for this is that governments have issued so much debt that they are unable to pay fair rates of interest on that debt. If they were to pay the holders of the debt a fair rate of interest Governments would default.
Margin Loans
Margin loans are another form of debt which has become popular to leverage into the Stock Market to achieve Financial Freedom. A margin loan is where a lender will lend the borrower a percentage of the share value to purchase shares in a particular company. If the share drops in value and the margin percentage is breached the lender will require the borrower to reduced the loan to restore the margin percentage. This is known as a margin call, if you can’t reduce the loan the lender will sell the shares at any price and you don’t want that to occur.
A margin loan can be useful so long as you have a good buffer on the margin percentage required to be maintained so that you stay in control and most importantly buy the share in the right company at the right time.
Education
Debt can be your friend in achieving Financial Freedom if used in the correct manner and at the most advantageous time. Your Financial Education will assist you in using debt to your advantage.
