"Live within your means and never borrow" is the advice any young person receives from a very early age from elderly people. So ‘debt’ is deeply ingrained in one’s subconscious mind as ‘bad’. Notwithstanding this, I have chosen the topic, ‘How can we smartly use debt in Personal Finance?’
You may like to refer my blog, ‘Good debts and Bad Debts’. Good debts are the ones that help you acquire assets and bad debts are the ones that help you to acquire liabilities. So, there is nothing wrong in borrowing good debts, of course in line with your Financial Plan.
Now let us look at a scenario of following your Financial Plan for five years or more. You have also gained confidence in managing limited good debts. Now the question, can you leverage your situation and borrow more good debts? My answer is,’ Yes’, subject to the approval of your Financial Planner or Financial Mentor. Let me list a few assets that for which you may do the additional leveraging:
- Your business venture vetted by experts in the relevant field.
- Employee quota of shares offered by your company (assuming that the offer is attractive).
- Tax saving instruments such as ‘five-star rated’ Equity Linked Savings Schemes (ELLSS).
- Very attractive property deal that can give you passive income to cover more than your repayment of loan.
- Lands that you and your friends can invest and derive agricultural income (from say coconut or mango trees) or trees (such as teakwood trees) that can give you good capital appreciation in ten years’ time.
- Higher education for your children (in deed, a true asset!)
In my opinion, the double-digit inflation that has virtually become a rule rather than an exception, is giving a clear wake up call towards more leveraging. But to take advantage of higher good debts, one has to improve his Financial Intelligence, which is a life-long journey. Even with the financial education, you should consult with your Financial Mentor before borrowing such good debts.
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