3 Debt Myths
It is human nature to want things and want it now. This is something like what kids do when you go for your grocery shopping. They usually demand for chocolates or food they like and they are like they want it now. It is also a sign of immaturity. Those who are willing to delay pleasure for a greater result show a sign of maturity. However, today is the culture of living for now. If we say “I want it now!” then indeed we can get it if we are willing to go into debt. Debt is a means to obtain the “I want it now” before we can actually afford them. There are certain myths that are attached to it which one needs to get cleared.
Myth: Debt is a tool to prosper
Many people think that by using debt they are able to prosper but the fact or the truth is that debt adds considerable amount of risk to your cashflows as well as to your personal balance sheet. Most often debt doesn’t bring prosperity. In fact, even the wealthy people never use it as much as others use it. So, debt though is a tool but is a tool in case you don’t have ready cash available with you in case of any emergencies.
Myth: Debt can help to create wealth
Debt is something which is spending your future income today. Use of debt can create asset but cannot create wealth. It is too risky to use debt to create wealth by investing in various instruments specifically equities. Equities are very volatile in nature and cannot give you same returns throughout the investment horizon. If you use debt to invest in them then it becomes risky as repayment is certain but the returns that you might earn by investing it in equities are uncertain.
Myth: Debt is cheap money
As debt is not income earned by you many people think it is cheap form of acquiring an asset. However, the thing is that if you look at the interest that you would pay to acquire a particular asset then you may incur more cost as you may have paid total debt plus interest more than if you would have done by saving for that asset. To understand it better let us illustrate it. Say you wish to buy a home for which you took a loan of Rs. 30 Lakhs at the rate of 8.40 per cent for 15 years for which you would be paying an EMI of Rs. 29,400 per month. You might think this is fine. So, now let us look at the interest that you may have to pay for the entire period. The interest works to around Rs. 22.86 Lakhs. This means that in total you may have to pay Rs. 52.86 Lakhs. Rather than this you may had invested Rs. 29,400 at the rate of 8 per cent for 15 years you may have accumulated Rs. 1.02 crore. While even if we assume that the value of the property increased at 8 per cent, then also the value of property becomes 95.16 Lakhs. So, it makes a lot of sense to save rather than to take debt unless it is necessary.