Conversations about debt often carry a negative stigma. While all people use some form of debt or the other to better manage unavoidable expenditures and important investments, it is still taboo to openly discuss the subject. This prevents people from seeking the right debt advice.
It’s never too late to use strategies that help manage your debt and strive toward financial freedom. It is also important to understand how best to use and manage loans and credit better.
Three essential rules for effective debt management
Learning to manage debt is important to stay away from poor personal financial health. Debt on its own is not always a bad thing; it makes a lot of our aspirations possible – a home, higher education, a wedding, a new business. It is the mismanagement of debt that is the real cause of financial stress, and this can be addressed with a little help from financial experts.
Apart from banks, you can also approach licensed money lending companies to receive such advice. In any case, there are three things that you can start doing today to manage your debt better.
1. Understand your debts completely – they’re not static
Firstly, to better manage debt, you need to have a clear understanding of each type of debt you have and the interest payable on each one of them. Interest rates for each type of debt can change over time. For instance, defaulting on a certain debt can attract penalty charges, and the interest rate might revert to the prevailing rate, which, in most cases, is higher than the existing rate.
In addition, most debts and loans charge compounding interests, and that would lead to the debts growing exponentially, increasing the amount you owe. This must be avoided and there are appropriate solutions to tackle each of these problems.
For this, it is prudent to seek credible advice from professionals and financial entities such as a licensed money lending company.
2. Ensure consistent timely payments for credit maintenance
Credit has played an integral role in providing financial freedom and helping people manage the ups and downs of having cash in hand, but irresponsible use of credit can lead to financial ruin.
The existence of credit in the form of credit cards, loans, and pawnbrokers has and will likely remain imperative in our society. However, it is critical to make payments on time to avoid incurring a higher rate of interest and late charges.
In addition, it’s important to pay your credit card bills on time as it impacts your credit rating.
3. Maintain a healthy credit score
Everybody has a credit score that enables financial institutions to look at one’s credibility in repaying a loan. It provides grounds for risk assessment of individuals and calculates the risk of loan default.
Hence, to secure loans, you need to maintain a good credit score by adhering to payment due dates and deadlines.
Leveraging debt as a financial tool to accomplish personal goals
Everybody aims to have a good standard of life and financial tools like credit, loans, and debt help people do just that. It is important to remember that these are simply financial tools and by and of themselves are not inherently bad.
Proper management of these tools can help us reach personal goals and dreams. To manage debts and loans effectively, put good strategies to use and calculate liabilities to assess your readiness for additional loans or credit.
Businesses make use of loans to kick-start their enterprise and progress towards revenue generation and financial gains. In the same way, so can individuals. Use loans and credit as a springboard toward monetary success. With the right financial knowledge, anyone can make this possible.
Using loans and credit wisely can help in building long-term assets
Loans and credit can be used to help secure long-term investments that can help you save and create assets in the future. This is important because a savings account barely covers the rate of inflation. See the example below.
| Period | Investing with a bank | Taking a loan |
| Year 2012 | Deposited $100,000 in the bank | Put $100,000 as a 20% down payment on real estate |
| No debt | Monthly loan repayment of $3,000 X 120 months | |
| Year 2022 | Savings worth $110,462 | Asset worth $1 million |
Based on a simple annual interest rate of 1% with no additional contributions or withdrawals, if an individual deposited SGD 100,000 in the bank in 2012, they would have approximately SGD 110,462 in savings by 2022.
However, if the same individual had used that $100,000 and invested it in real estate as a 20% down payment, assuming an interest rate of 4%, he or she would’ve been able to purchase an asset worth $500,000 with a monthly loan repayment of $3,000.
Today, that individual would possess an asset worth around a million dollars. This teaches us how and where to use debt so that it benefits us in the long run.
Seek professional financial advice for responsible borrowing and personal success
We live in a world that puts a lot of pressure on fitting into the image of an affluent and globalised society. This pressure can cause us to make poor financial decisions. By seeking professional advice on financial matters, especially loans and debt, we can practise responsible borrowing and reach important personal successes in life.
If you are unsure about your loan requirements or simply want to explore your options, contact CashDirect and speak to our consultants on how you can manage your loans and debt more effectively.
