Its really interesting.
For example I've built up a stack of CC debt while I put what I would spend into my van fund savings account. I thought it better to take that than get a loan.
So right now I'm sitting on 18k of CC at 0pc for 18 months and 18k in cash looking for a van.
For me I just see that as 0. Same as mortgage. Is just subtract my savings from my mortgage debt and see that number as net debt.
Its interesting how different minds work
Not all debt is bad, if a person is borrowing money to increase their wealth or their chances of earning more in the future. I would consider that as good debt. Taking responsible loans for education, transport, tools, experiences and paying assets should increase a persons odds of increasing their wealth. It’s particularly using leverage to increase wealth.
Taking a loan to buy items that depreciate or have a higher cost to maintain than to bring in would be a bad debt.
The issue is that often we don’t know which is which at the time of purchase, we can only rely on past performance.
People buy houses for shelter, some people buy houses as an asset to resell or to rent out. We all assume that the appreciation of houses goes up therefore the value of the house goes up and it’s a good debt. But there’s been periods where house prices goes down and people have negative equity in their houses, making it harder to get remortgages or more costly to get remortgages.
Like wise with credit card debts, I have about £600 pounds monthly cycle CC debt that I pay off every month, it’s appears as I pay for everything I can on the CC, I get extended insurance, cash back and other rewards for using a credit card, it disappears at the start of each month as I pay it off.
I have about 1k in a mid term credit card, 0% rates.. I use it to pay large bills, it’s better for me to use the CC than to take cash away from my investments or use a finance plan that charge interest. I chip away at it and make sure it’s all gone before the introduction period is over.
Finally I have about 5k of long term 0% loan, which was completely of my choice. Did I need to buy so many expensive watches, no.. but it was a reward to myself. I manage to get a discount on the watches plus freebies at the time of purchase and it was a way of rewarding myself. I can try to justify it by saying the RRP of the items have gone up even more than inflation, and the money that I could have used is earning me compound interest in a risk free savings account so in an odd way; I’m leveraging a loan to increase my wealth.
The issue comes the CC companies stop doing interest free cards or my stream of income is effected. Say if I can’t get another 0% purchase card, I would have paid the 1k off my existing card and any future large bills would have to come from my savings, a manner that I’m just not used to as I’ve been operating like this for over 20 years. Even the idea of having to pay for a transfer fee for the mid term debt to be transferred over to 0% month card sends me into shivers. Lol
I just try to keep my debts amount plus my emergency funds lower than the amount I have in saving. That way if the **** hits the fan, I can pay off everything I owe, reducing my monthly outgoings and have enough cash until I get back on my feet without having to sell of assets and shares.
It’s all about risk appetite and how well you can manage debt. I know as a student, I could not manage my debts at all.. I was so bad at it that I defaulted on what seems a large scary sum at the time, that’s a laughable amount now but that experience has taught me so much about personal finance.
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