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Do You Hate Debts?

>> Friday, July 22, 2011

With so much market talk about the Greek Debt Crisis, what exactly happened to cause such a huge impact on global markets?

A quick summary in my own opinion was that Greece being a developed country with a strong currency, they enjoyed a good credit rating, so they could borrow money cheaply (at low interest rates). However, the government over spent this cheap money and borrows more to repay the installment of the previous loans. So it seems like a ponzi scheme. Everything works fine until you are borrowing too much and get charge a higher interest rate on new loans. So, you have to borrow more to repay the higher interest, borrowing more means even higher interest rates and a vicious cycle starts.

Imagine borrowing from another loan shark an even bigger loan that charges a higher interest rate to repay an earlier loan taken up with a loan shark and carry on doing it.

The solution now is: A) go into default, but the repercussions are people will lose confidence in other developed countries, especially in the European Union (EU) and they can no longer borrow cheaply. B) derive real income to pay back instead on relying to borrow more (increase taxes, cut government spending, etc). C) be allowed to borrow more at low interest rates to carry on the scheme, but eventually reverts back to option A or B.

Well, so far, EU is approving option C while hoping and delaying for option B to be the end state. But option B is unpopular with the citizens in Greece.

It sounds like a disaster and probably why most financial experts advise that debt is a bad thing and you should hate it. But should that be the case.

Comparing with other developed countries who could manage their budgets better, the cheap financing allowed their governments to build more infrastructure, improve the standard of living and enhanced the country economy. Resulting in the rich getting richer, it all boils down to balancing the budget and achieving a rate of return higher than the loan interest rates.

Similar to the biggest loan most of us will ever take up, our mortgage loan. There is good debt and there is bad debt, it is a double edged sword. Bad debt is over leveraging, buying a property that results in loaning excessively, where day to day expenses are compromised to service the loan. A good debt gives a healthy cash flow where one can enjoy a better standard of living.

Do not fear and hate debt, manage it. Although it can be your enemy, it can also be your friend. To manage your mortgage debt, you can refer to my earlier post.


Anonymous July 22, 2011 at 4:20 PM  

Debt is never good even if your present cash flow can service it. But if you have no choice but to take a mortgage for your only dwelling, you still have to be prepared when your cash flow get blocked, you have stand-by assets to convert in time to cover for servicing the debt temporarily, till your cash flow is flowing smoothly again.
Or else be prepared to declare insolvency, (bankrupt).

If you are running a business, of course the more OPM the merrier. Ha! Ha!

Lau July 22, 2011 at 4:34 PM  

Hi Temperament,
Not true, it is not necessary to take a mortgage, you can rent. You take a mortgage to invest in the property with OPM.

CreateWealth8888 July 22, 2011 at 7:24 PM  

Most senior (older) investors have experienced stock market crash and their pains have been told to their kids, relatives and freinds.

Fewer senior (older) investors were into properties investing so their pains in property crash are untold and less known by others.

financialray July 22, 2011 at 9:10 PM  

Hi Uncle 8888

I agree there are perhaps fewer people into property investment compared to stocks but it is because more capital is needed. WIth due respect, most property investments over the long term do make good investments. More money is made too because of leverage. Of course if you lose in property investments, you lose more due to leverage. So never overcommit and always buy property for long term, just like Warren Buffett holds his stocks for long term. Statistics wise, most of the rich definitely have property investments, some of them among the richest. Good debt definitely exists but more importantly, as with any investments, do one's homework and minimise the risks and make sure in the event of a disaster, we can hold the investments and ride it out.

Anonymous July 23, 2011 at 8:12 AM  

What is debt?
Do you really think you are using OPM?
On the other side of the coin you are really depleting your future wealth (earned income) now. Let us suppose you can buy with cash or CPF's fund, how much more your current wealth will be compounding daily one way or another.
Of course if you have to borrow, you have to borrow then.
I think in Singapore, it is a costly strategy to rent in the long term, unless you want to do a capital maximisation for investment for the short term.

I bought my 1st HDB with only a year mortgage loan. 2nd,then 3rd HDB without loan because times were "better" then. In fact, the 3rd is a purposed downgrading, so i made a $little , for the housing market was not so good at that time.
Different folks, different stroke.

financialray July 23, 2011 at 10:08 AM  

Yes, certainly I was not using my own money. In 1999, my wife and I only had a few thousand dollars in our bank accounts. We borrowed 20k from our parents and had a HDB grant for our 1st property, an EC. It was a whopping 450k to us but we thought it was ok for owner occupation and we were just starting on our careers. Last year, we sold it for more than 300k profit. Excluding rental income for last 2-3 years, it would have beaten any multi-bagger in stock because I was not monitoring the prices till last 1 year, to sell.

Createwealth8888 July 23, 2011 at 12:37 PM  

Hi financialray,

After selling your first HDB home at very nice profit, did you buy another property to stay or live?

financialray July 23, 2011 at 1:33 PM  

Hi Uncle 8888
Call it Beginners' Luck. In 2004, my wife already started planning the primary school which she wanted to send my eldest son to. So she plonked about 60k of our savings, which was almost all we had after repaying our parents.
It was an upgrade we again thought we could barely afford. Those days, immediately post SARs, showflats were empty and we even had quite some time to decide which unit and which floor we wanted. Now, its worth almost 2x what we paid for. Unfortunately, we could not sell this one for a handsome profit as we are living in it. However, I am planning for this current abode to be another multi-bagger property. Good news is MRT is coming right up behind my current place in 2018. So I will be house hunting in the next down turn and I am sure it will come before 2018.

financialray July 23, 2011 at 1:56 PM  

Hi Uncle 8888
To be honest, I believe there are many others out there who have done better than me if they had bought properties from 2000-2006 and hold it till today.
My profits is actually peanuts compared to many of them, considering I took slightly more than 10 years.
As they always say, timing and location determines how much one makes in property investment.

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