For a long, long time, debt has always been treated as a dirty word by many. After all, the thought of owing someone money isn’t something you would be proud of.
But debt isn’t all doom and gloom. The truth is, debt can actually be a good thing for your finances - yes, there are even healthy debts out there that you should consider taking up!
At BigPay, we’re all about making smart decisions about money and your financial wellbeing. For our first #LetsTalkMoney series, we will cover Malaysia’s household debt issue, good debt vs bad debt, and how you can stay one step ahead in managing your debt obligations.
The first step in solving any problem is recognising there is one.
While everything looks rosy on the surface, the financial health of most households in Malaysia is in need of improvement - we seem to like taking in bad debts!
These numbers don’t lie - in 2019, 45.7% of Malaysian households are in debt from taking loans for vehicle purchases, personal loans, credit cards and others.
Recent reports, stretching back to 2018, have also clearly shown a worrying surge in bankruptcy cases. Defaults in vehicle and personal financing debts and loans make up 49% of all bankruptcy cases. Bankruptcy cases involving personal financing and credit card debts have grown by 104% and 43% in 2018 compared to 2012.
Most worryingly, 69% of bankrupt borrowers were between the age of 25 and 34. Yikes!
Is there really such a thing as good debt?
The short answer? Yes - good debt as a portion of your household debt is almost always a form of valued investment that helps you increase your earning capacity, generate income and increase your net worth. In fact, any of these will be a pretty good sign that it is a good kind of debt. Let’s see some examples:
Debt in the form of student loans for higher education
While university dropouts are all the rage these days (thank Mark Zuckerberg for that inspiration), a university degree is still a stepping stone to many careers out there.
A degree or a diploma undoubtedly increases the likelihood of securing a higher-paying first job and potentially boosts your future prospects. Therefore, higher education debt is likely to be paid off after you start work. Do also take note of the debt interest rate. Typically, Malaysian student loans have a much lower, if not 0% interest rate compared to other types of debt.
Debt in the form of mortgages for property investing and homeownership
One of the greatest milestones of #adulting is, of course, securing your first property. But unless you’ve been significantly blessed, owning a property will require a mortgage or a housing loan. But isn’t a mortgage just another phrase for long-term debt?
Indeed, a mortgage is a debt to the bank that has to be repaid in the long term. So why is a mortgage a good form of debt? Because it significantly increases your net worth in the long term due to asset appreciation.
After securing the mortgage, the value of the property is tied to your net worth - and most of the time, the value of property always increases. That means a $400,000 property that you take out a loan for today might be worth $450,000 in 3 years!
Taking out a mortgage for the purpose of investment (taking a loan for the property, then leasing your property for more than the monthly payments) can even generate income at the same time!
That’s exactly why mortgages can be considered good debt as your own net worth increases, as well as a potential upside to cash flow as well.
You might already know this, but avoid bad debts at all costs
The trouble with household debt starts when you borrow money to buy something that depreciates in value - we’re talking about things like jewelry, smartphones, or fashion items to name a few. These are, as you can tell, bad debts.
Debt in the form of a vehicle loan
New cars are hands down the worst from a money standpoint. The moment you sign the papers to turn a car from “New” to “Owned”, you lose about 10% of the value of the car - and that’s just the start!
Sure, a car might be a necessity for work, but getting into heavy debt over a depreciating asset is exactly the reason why bankruptcy cases are rising among the young.
Debt in the form of credit card interest repayments
Firstly, there’s absolutely nothing wrong with credit cards if you pay off the remaining balance every month. In fact, it’s a surefire way of building your credit score for a mortgage mentioned above!
But once you find yourself unable to pay the balance at the end of the month, this is where credit card debt gets ugly. Interest rates for outstanding balances on credit cards are viciously higher than almost any other consumer loans - we’re talking double digits at 10+%!
3 key steps you can take to avoid being just another statistic
1. Never, ever fall into credit card debt
Be vigilant in paying off your credit card balances, even if it means tightening your belt.
2. Think carefully about what you need vs what you want
If you can’t pay it with cash (or via your mobile wallet), you can’t afford it. There are not many things in life that you must take on debt to acquire (apart from a property, emergency medical funds or a car out of necessity), and the latest pair of NMDs or a foldable smartphone isn’t one of them.
3. Make smarter money decisions & follow the 50/30/20 rule
Planning for good debt and avoiding bad debt is one of the smartest financial decisions you can make today. Of course, this can be supercharged with brilliant budgeting - have you tried the 50/30/20 rule?
We hope this article kick starts your smarter money habits, and we are always happy to share and talk to you more about smarter money decisions.
Let us know what you’d like to read more about in the comments below for our next piece on BigPay’s #LetsTalkMoney series!
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