Thursday, April 18, 2024

LOUISE FAIRSAVE: Can debt provide wealth?

Date:

Share post:

THIS ARTICLE DISCUSSES the final scenario for consideration in this series of presentations on using debt wisely: Is the statement, “If you wish to build long- term wealth, you should avoid debt as much as possible,” true or false?

This is profoundly true. From a personal finance point of view, your greatest wealth-building tool is your earnings and your money management habit – how you spend, save and invest the money you earn. This statement summarises the recommended approach to using debt wisely: get out of debt as soon as possible.

Let us start with a definition of wealth as financial independence: being able to live at the standard of living which your working income had provided although no longer working. That is having a dependable stream of passive income that supports your normal standard of living.

There is no doubt holding debt which increases earnings well beyond the cost of the debt is a route to propelling the debt holder towards a wealthy position. Many investors have used debt to grow their investments rapidly over time. However, this is a vastly more risky proposition. Should the movement in interest rates go against the borrower, the burden of that debt could lead to possible bankruptcy. 

Todd, a financial mentor, sets out a simple online step-by step guide for building wealth without debt: http://financialmentor.com/wealth-building/how-to-build-wealth/7699.

In addition, a personal finance Lifehacker blog sets out the four basic pillars of wealth building, which are:

1. Spend less than you earn, 2. Earn more,

3. Pay off debt, and

4. Invest.

The detail of these four pillars can be read at the online blog http://twocents.lifehacker.com/no-matter-what-building-wealth-always-comes-down- to-th-1692215227.

There is no doubt that you can use debt to build wealth. However, in the long term, debt-free investing works better, requiring good money management habits over a prolonged period in order to exploit the positive effect of compounding interest gains on savings and investments. 

Investing does involve risks and it is possible that as a new investor, you may lose your investment or impair its value. However, you have the opportunity to continue your savings and try again. Once you are holding no debt and you maintain good money management of your income, without debt, you live to fight another investment day.

Using debt to build wealth is possible once the cost of the debt is lower than the increase in personal net worth built by leveraging that debt. That is why consumer debt is bad debt. For example: borrowing to finance a wedding, an overseas trip or an anniversary party will reduce your net worth as there is nothing significant to add to the asset side of your net worth statement and increased debt to be added to the liabilities. Similarly, borrowing to finance furniture or a vehicle may negatively affect the borrower’s net worth where such assets rapidly depreciate.

Thus, it takes an in-depth analysis of the cost of the debt used to finance any asset as compared to the growth in the value of the asset over time in order to make a wise decision. Yet, the risks of holding debt still obtains.

Although the best debt is no debt, here is an online article which set out seven powerful ways of using “good debt”: www.linkedin.com/pulse/20140901221634-123512066-7-powerful-ways-to-use-good-debt-to-create-wealth.

Ultimately, your best wealth-building tool is your income and it is in your interest to get out of debt as soon as possible – as set out by Jason Cabler in his free online course: www.cfinancialfreedom.com/the-best-wealth-building-tool/

• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: LouiseFairsave @nationnews.com.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Related articles

Rihanna says fashion has helped her personal ‘rediscovery’ after having children

Rihanna has told the BBC that being able to wear fashionable clothes in public again after having two...

Court closed after bedbug found

THE OISTINS MAGISTRATES’ COURT has been closed after a bedbug was found in a chair inside the court...

Another appeal for ganja ease

GENERAL SECRETARY of the National Rastafari Registry Secretariat Trust, Paul “Ras Simba Akomba” Rock, is once more appealing...

Lewis Hamilton says he plans to race ‘well into’ his 40s

Lewis Hamilton says he will join his old rival Fernando Alonso in racing in Formula 1 "well into...