Debt investments - A powerful bet for financial success
Article by Sajish Pillai, Managing Director, Assets and Strategic Alliances, Consumer Banking Group at DBS Bank India
Debt has long been a controversial topic in personal finance, with many people viewing it as a financial burden that should be avoided at all costs. However, when approached with a prudent and strategic mindset, debt can be a powerful tool for building wealth and achieving financial success.
The key to using debt to build wealth is to have a solid financial plan in place. This means having a clear understanding of your financial goals, a budget that outlines your income and expenses, and a strategy for how you will use debt to achieve those goals. It also means having an emergency fund in place to cover unexpected expenses and paying off any high-interest debt before taking on any new debt. With a solid financial plan in place, a savvy individual can begin to explore different types of debt and how they can be used to their advantage.
One type of debt that can be good for building wealth is debt used to acquire assets that generate capital growth or income/cashflow, or that is tax deductible. This type of debt is typically incurred for investment options that minimize personal risk, as the underlying asset produces income. By borrowing money, putting it to work and creating returns, investors can grow their net worth over time.
But isn’t debt a bad thing? Not necessarily. One should carefully consider the terms of any debt they take on. Interest rates, fees, and other factors can significantly impact the overall cost of the debt, so it's important to shop around and find the best possible terms for your financial situation. Maintaining a strong credit score can also help qualify for lower interest rates and better debt terms.
One common way to use debt to build wealth is by taking out a mortgage to buy a rentable property. By leveraging the bank's money to purchase an asset that has the potential to appreciate in value over time, investors can build equity and increase their net worth. The rent from the property can also help repay the loan and provide some income tax relief.
Another way to use debt to build wealth is to invest in stocks, either by taking out a loan or using a margin account. By investing in high-quality stocks with strong potential for growth, investors can potentially earn higher returns than they would with traditional savings or low-risk investments. This strategy however comes with risks and it's important to have a solid understanding of the stock market and a clear investment strategy before taking on any significant debt.
Today, individuals can also utilise existing assets they own to avail low-interest credit. Assets such as stocks, bonds, mutual funds, gold ornaments, securities, insurance policies, or fixed deposits can be offered as collateral to obtain low-cost capital from banks. Collateral-backed loans allow individuals to obtain low-cost capital to invest in assets that appreciate over time and generate good returns.
It's important to remember that using debt for wealth creation also comes with risks. If one is unable to repay the debt, they could face serious financial consequences, including bankruptcy or foreclosure. It's essential to have a safety net, a plan B or alternatives that can help one comfortably repay any debt they take on.
Using debt to build wealth can be a smart financial move when done responsibly. By leveraging debt to invest in assets that appreciate in value, investors can potentially earn higher returns and achieve their financial goals faster than they would otherwise be able to. However, it's important to carefully consider the risks and ensure that one has a solid financial plan in place before taking on any significant debt. With careful planning and a solid financial strategy, using debt to build wealth can be a powerful tool for achieving financial success.
As featured in LiveMint