Last week we asked you if you thought Singaporeans are wise about saving money. Turns out the general opinion could go either way. Nevertheless, hopefully after reading our article you now have new insights into the common misconceptions of saving money.
For our readers interested in investing, do stop by an
investment blog<
http://atans1.wordpress.com> started by one of our partners. Check it out. Once part of Hong Kong-based, now defunct AsiaWise, Hong Kong based brokers and fund managers enjoyed his daily takes on Asian stock markets. A common refrain was, "You will not always agree with his analysis, view, or opinion but he always has an interesting take.
This week, Qotion is here to discuss about good debts and bad debts, and how they affect us in our daily lives. Most of us already know that not all debt is alike, and some can actually be beneficial for us. Qotion regards a good debt as a situation whereby we get to use other people's money to gain some economic benefit for ourselves. Conversely, bad debts cause us to be financially worse off than when we started.
This distinction is important, since in reality we are not as able to distinguish a good debt from a bad one easily. Many people still define good debts as debts taken out for something we need, and bad debts as debts for something we want. E.g. An education loan is a good debt while a car loan is a bad one. However, such a definition does not help us understand how good debts make us financially better off than bad ones.
A good debt should have the following characteristics:
1. The cause of the debt must have reasonable potential to earn higher returns than the debt interest
2. The longer the payback period, the more beneficial it is
The reasoning for this is simple. If your returns cover your loan interest, you essentially fund a profitable activity for free. If you are funding a profitable activity for free, you essentially get more cashflow at no cost for the duration of the loan. This makes your finances more liquid. Additionally, if you have other bad debts to clear, it makes no sense to pay off your good debt before your bad debt.
Due to these characteristics, we should always try to increase and prolong good debts while reducing bad debts. Viewed in this light, debts like education loans, or medical loans, while taken for needful causes, are not good debts and therefore should be paid back ASAP.
So if these debts aren't good debts, what are? Some examples of what we consider good debts in our daily lives are listed below:
1. Home Mortgages
The value of residential properties in Singapore has been on a generally upward trend for decades and looks set to continue. In addition, mortgage interest rates are among the lowest in all the different loan types. Rushing to pay off a mortgage loan may look tempting, but the additional capital will be more useful if entered into an investment.
2. Investments
The idea of borrowing money to invest in equities and other instruments is not new. However, not many people do it for long term investment because while the returns are uncertain, the costs are fixed. Moreover, it is not easy to find relatively safe investments with higher yields than the interest rates charged for most loans. Nevertheless, borrowing for investments can be considered a good debt if you have little upfront capital and expect a large return, as in periods of market turbulence or recessions.
Now that we've talked all about good and bad debts, do you think Singaporeans are knowledgeable about good and bad debts? Share your thoughts with us in our question of the week!
Have a good weekend!
