You might have heard some old advice that it’s better not to take on debt. Pay everything in cash.
Sure. It might help you sleep better at night knowing that you don’t owe money to anyone. Yet at the same time, this is hardly practical advice.
Think about it – if you had to save up to buy a home entirely in cash, how long would you take to do it? A decade? Two decades perhaps.
During that time, you might have spent a sizable chunk of your net worth paying rent. Money that could have gone into the equity of your property.
During that time, your property might have grown considerably in value. So you might not even have enough money to purchase the property this time around. You’d also have missed out on huge capital gains.
Another reason why you might take on debt is that it actually gives you more financial options. For example, if you prove that you’re a good payer, your credit score will improve. So if you are planning to buy a house or property, you can get a fixed rate home loan immediately
So debt can be a good thing. If used wisely. In this article, we give some advice on when to use debt and how to pay it down quickly.
When to use debt
When deciding whether or not to take on debt, you might feel a bit anxious. Should you take out a loan for every purchase? If you had to choose between your purchases, which one should you fund with a loan?
Well, here’s a good rule of thumb:
Take out a loan for things that appreciate in value (i.e. investments.)
For most people, this would mean a mortgage for their home.
What’s the reasoning behind this? In one word: leverage!
Using debt will allow you to purchase large investments that you would not otherwise be able to buy. With just 20% of the asking price, you’re able to take control of a home. This allows you to participate in its capital appreciation and rental yield.
Sure, you’d have to make the monthly repayments. But most often, you’ll find that you actually end up with a high return compared to paying for the investment upfront in cash.
Now, what if you’ve already taken on debt and want to pay it down as quickly as possible?
Effective ways to free yourself from debts quickly
Create an emergency savings fund
Emergencies always happen. With this, you have to be prepared for them. Create an emergency savings fund for any unexpected costs or bills that might appear. In case you need to apply for a loan, at least you can repay it with this fund. Keep in mind that it always pays off to be ready than not at all times.
Make a payment plan
Start making a plan in order to be free of debt. Simply know how much debt you currently have and record to whom you owe money to. Organize then your payments in terms of urgency and determine the amount you can pay each month. More so, if you can pay off a high interest loan then it will be more advantageous for you. However, in case you have a loan that does not need to be settled yet, you can compensate your other obligations first.
Cut down on expenses
Nobody gets to escape debts if you can’t trim down your expenses. Assess your monthly spending and know the things you can still change. By cutting down costs, you will have more funds to pay off your loan. Simply cook your own meals instead of dining out, exercise at home rather than at the gym, or cut your cable television. You don’t really have to deprive yourself, but it’s the best way to save up and be able to pay off debt quickly. No matter how small the amount you spare, it still matters and will make a big difference.
Whenever you think of your debts, it will surely cause you stress. However, there’s nothing to worry about if you follow these smart tips specified above. You will be able to settle all your debts if you learn how to budget your money wisely and are determined to pay them all on time. So, prioritize the essential things first and live a debt-free life.