How Productive Debts helps to build wealth
There are many ways to be wealthy. One of them is by planning your financial correctly. Therefore, there are many things that should be done – some of them follow the formulas trusted by many people – to plan your financial successfully. However, are all those formulas correct?
Have you ever heard the term productive debt or consumptive debt? Or have you ever heard stories about rich people – or ultra-rich people – who own properties and wealth that are paid from debt? Even back then, before that so many monetary crisis, there were many businessmen who were very rich but owned lots of debts. Back then, they were called productive debtors because they used their debts as working capital or running a business so they could grow bigger.
The concept of productivity will be defined as return on investment. Essentially if there is a return on investment then that will be classified as productive debt and if there is not then that will be unproductive debt. Productive and unproductive debt will be subdivided into different categories each. Consumers will be probed to divulge to what extent they invest their loans in educating themselves, educating their children, building onto their house for rental purposes or investing in a business (productive debt) against spending their money on clothing, lending to others not for profit or alcohol (unproductive debt). By capturing race, sex and age amongst other parameters, it will be possible to provide a deeper understanding of spending patterns within these categories.
Or, in another case, you might have heard during the crisis, especially during the fall of stock market, people sold all of their stocks at the same time. However, on the other hand there were people who bought the stock with a risk that the stock would continue to drop, or – hopefully – would rise. The result? Some of them continued to drop and there were some who achieved great success.
Those are the facts surrounding the financial. There are 'anomalies' that often times are against the 'formulas' applied in the field. Then, how should we act towards the inputs and ongoing situations? there are things that we should think through regarding the financial 'myths'.
1) putting our faith in the traditional understanding of debt; the productive debt and consumptive debt. Many people say make debt on things with increasing values, such as house or land. In opposite, do not make debt on things with decreasing values. This is a wise advice for many people but, who can guarantee that the value of a house will keep increasing and we can keep paying?
Therefore, the thing that must be reconsidered about this 'myth' is that debt is a debt. It suggests that making a productive debt is alright, but do it with a careful planning. Because if unexpected condition occurs, we must be able to bear the debt, otherwise the debt will ruin our life. Therefore, the right thing to do is by paying off the debt as soon as possible and live by planning our financial more carefully so that it will not burden our mind.
2) giving up easily by predicted circumstance and condition. There are news, people, and rumors that say the economy will be this way or that way. There is always a reason for all those statements. As precaution, we need to prepare ourselves. However, if it turns into fear that makes us not doing anything, then we will remain that way.
The best way is to keep ourselves motivated. Spend more time with successful people that can motivate us. Therefore, whatever the conditions are, we will be mentally prepared and always able to do the best in our financial planning and investment.
3) do you have a loan that lasts for 20 years or more profitable? If you have, try to do a re-calculation. A house that costs Rs.20,00,000, 20 years from now the value paid can cost more than Rs. 50,00,000, even more. So, where does the Rs.30,00,000 go? it is better if we pay off our debt faster. Other than reducing our burden nominally, the money can be used for other use.
Specifically for this point, there are many things that should be considered; because if the value of the house indeed increases compared to the inflation rate per year, then the house can be profitable for us. However, this should be put into consideration if the house is for investment. If the house is used as a place to live – as long as we can afford it – then it is worthwhile.
4) thinking that manage our bills through the bank is lavish. For this one thing, it suggests us arranging an automatic payment for our bills using the money in our account or our credit card. There is only one reason for doing this; forgetful.
Sometimes, because we don't want to get more complicated with bank – or in an extreme way; we do not want the bank to take our money, even though it is just a small amount as administration fee – we become troubled at the beginning and the end of the month for paying our bills. And if for some reason we forget or late to pay, we must pay for the fine.
That is why , we pay our bills automatically through the bank. Because even though we have to pay for the administration fee, the fee is nothing compared to the fine we must pay if we are careless for not paying our phone, electricity, water, or other bills.
That is why , we pay our bills automatically through the bank. Because even though we have to pay for the administration fee, the fee is nothing compared to the fine we must pay if we are careless for not paying our phone, electricity, water, or other bills.
Actually, these things are very common to happen. Therefore the key in managing our financial successfully lies in our self-discipline. By being discipline in managing and obeying our financial schedule that has been planned, we will be able to achieve maximum result.
Best Regards
Prakash Nair
www.keralites.net          |
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