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Staying calm during volatile market movements

Staying calm during volatile market movements

The markets do not react to war or other economic events very well and it does not matter that New Zealand or other countries which have nothing to do with the war are far away from the centre of the event. Whether it be the conflict between the USA and Iran, inflation, or economic events in the US.

Investors have their own thoughts on the markets with many saying “Now is not the time to invest.” 

Those with little experience at investing may find the market volatility a bit on the scary side, but the markets have been through this previously and each time came out of the dark tunnel out of the other side.

There have been about 20 wars in the past century which have affected the markets, most notably was World War 11. Most of these markets recovered within 12 months of the war ending. 

It may be so that the markets are down as a result of this war but really it is more due to the blockage of the channel which has caused the oil and gas supply shortage which is the main culprit of this market downturn.

This is likely to hit Trump hard in the pocket if it continues and the President will be as concerned about his portfolio as no doubt other investors are. He is looking for a way to end this conflict. This may be outside of your control, but your portfolio and how you respond to current affairs is something you can control.

Whatever is happening in the world and however the markets are responding is not a reason to react and allow emotion to rule your investment strategy. If you have planned your financial strategy then  you should have taken into consideration the volatility which occurs in the markets. 

If you are too cautious you will miss opportunities which are available.

Those who are contributing to their retirement fund should continue to drip feed money into the markets.

Those who have a lot of their wealth tied up in shares should sit tight because it is not a time to sell. On the contrary, those who are in a position to do so can take advantage of the lull in the share market by purchasing shares at a lower price.

If you have a lump sum to invest then an idea is to just invest a portion of it in the markets every week in order to take advantage of the lows in the markets. This is called dollar-cost averaging.

I use this strategy when investing in sharesies. I choose one New Zealand company to invest in per year and drip-feed money into this company throughout the year. This year it is Meridian Energy.

This is a strategy I have used for buying Bitcoin. That way I have bought some cryptocurrency when the price is both up and down.

Those who are fully invested should hang in there because it is not the time to sell. Your investment decisions should be made with your time frame in mind. That is whether the fund is for the long-term, medium-term, or short-term. If you need the money in the short-term then you should not be investing in something volatile, otherwise you may find that your fund has fallen in value when it comes to using that money.

About this article

The information in this article is of the experience of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website or ebook. 

Read my other articles on www.robertastewart.com

Saving money on fuel isn’t about one major change; it’s about the “aggregation of marginal gains.” By combining better maintenance with smoother driving and smarter shopping, the average driver can save hundreds of dollars a year.

Get this Guide on How to Save on Fuel

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Asset Rich but Cash Poor

 

Written by R. A. Stewart

Asset rich but cash poor is when one has substantial non-cash assets but has little money to spend. It is not uncommon for someone to have a home worth several hundred thousand dollars but are struggling to pay their weekly household expenses.

It is not only real estate that can be considered non-cash assets; a retirement account and a business fit into this category because you do not have easy access to wealth which is tied up in these things.

Having an asset which can be easily turned back into cash is important. 

I heard recently that the over 60s considered their home as their biggest asset. This is an age when retirees think about travelling. Personally, I don’t see the point in the elderly spending their money on their house only to just leave the house to someone else when they pass on. 

The elderly have requirements that can turn out to be costly in later life. Therefore, having liquid assets which can be easily turned back into cash is important.

Health issues can strike at any time and without warning, therefore having some kind of financial cushion can soften the blow.

Solutions to being asset rich but Cash poor

  1. Downsizing

Living in a smaller less expensive house can release capital which can then be invested in liquid assets. Diversify your wealth so that there is a balance between non-cash and cash assets. Living a more modest lifestyle will enable one to live more comfortably. 

  1. Equity Release/reverse mortgage

This is when you borrow money using the capital in your home. The money is paid back along with the interest when you die. This option is not suitable for those who want to leave their property to the young ones in their will.

  1. Live within your means

Set a budget and stick with it. Get into the habit of saving and investing. Don’t fritter your money away without any thought for the future.

  1. Invest regularly

Don’t just invest into your retirement fund and leave it at that. Get into the habit of investing some of your discretionary spending money. These days online investing platforms have made it possible to drip-feed money into the share market. It is just a matter of being a consistent saver.

Your Personal Circumstances

Everyone’s financial circumstances are different, therefore any adjustments you make to your asset base must be in alignment with your own goals and financial situation. You may have most of your assets in real estate and still manage to live comfortably. If that is the case then you are doing well.

The thing to consider is that many people like to use their home as part of their retirement fund. By downsizing in retirement, they are able to start travelling abroad.

It is all about living in balance and clearly setting out your priorities. Any decision you make regarding your own asset allocation must be your own and no one else’s. 

Owning assets which can be easily turned back into cash when needed is convenient when the time comes. I remember a retired chap told me that he bought a new car using money he had in his kiwisaver account. This was just prior to when the pandemic of 2020 started. The markets had started to fall after he had bought the car. I told him that no wonder he is smiling because he would have had less money in his kiwisaver if he waited another month to buy that car. This fellow also told me months earlier that his wife had a knee operation costing 30k. I never thought to ask him how he paid for that. 

Health issues will creep up on you and having the means to pay for it all is a problem for a lot of people. Setting up your finances smartly can set you up for the latter part of your life.

About this article

The content of this article is of the opinion of the writer and may not be applicable to your personal circumstances, therefore, discretion is advised.

You may use this article as content for your blog/website, or ebook.

Read my other articles on www.robertastewart.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Investing in New Listings

Investing in New Listings

Written by R. A. Stewart

Is it worthwhile buying shares in New Listings, also known as Initial Public Offerings?

I have read that these have the potential for significant early gains, but they can at the same time be risky. 

Pros

There can be benefits in investing in new listings.  They are:

  1. High growth potential if the company performs well in the early stages
  2. You get the chance to invest at the offering price before the company lists on the stock exchange.
  3. The IPO process has stringent rules meaning there is increased scrutiny on the company prior to listing.
  4. Newly listed companies are often hyped up meaning that the share price rises sharply soon after listing.

Cons

There are some downfalls of investing in these new public offerings. They are:

  1. There is limited data to use for making a future prediction.
  2. Shares can be highly volatile if the market is down or the company fails to meet its expectations.
  3. If the New listing is oversubscribed you may receive fewer shares than you requested.
  4. The new listing can be overhyped by its promoters that the price per share is set too high leading to a drop in the share price once the trading starts.

Things to consider

  1. Read the prospectus and do your research online to make sure you understand the risks involved.
  2. Company insiders may not be able to sell their shares for a set period of time and when this set period ends there may be a considerable drop in the share price.
  3. Access to new listings may not be available unless you have a brokerage account, however, they may be available through online platforms such as sharesies and robinhood which allow you to purchase shares with a minimum of investment.
  4. If you don’t have the time to research individual IPOs then maybe you can invest in an Exchange Traded Fund  (ETF). This way you are able to invest in a range of IPOs without trying to pick a single IPO.
  5. Monitor the stock after purchasing it to see how it is going. There are some influencing factors which determine the directions of the stock. This can be initial public demand and hype, market sentiment, and economic trends.
  6. My view is that Initial Public Offerings are not for long-term investing but something which can be part of your portfolio as an added interest. The same rules apply to initial public offerings as they do with any other company you are investing in. The questions you should be asking is:
  7. How does this fit into my financial strategy?
  8. Can I afford to lose this money?
  9. How have similar companies fared in the past?

In a nutshell you should do your own due diligence because you are the one who has to live with any financial decision made concerning your money.

About this article: The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website or ebook.

Read my other articles on www.robertastewart.com

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Why Asset Class Diversification is Your Best Defense Against Volatility

Written by R. A. Stewart

When it comes to investing, it is important to invest according to your risk profile. This means diversifying your investments in several asset classes in order that you may take advantage of the highs in each asset class, and at the same time, minimizing the effect of a downturn in one of those asset classes. 

An asset class is a group of companies which have similar characteristics. They react to economic events the same way. A financial advisor will focus on asset classes as a way to reduce the risk and help investors to diversify their portfolio.

Each asset class offers different levels of growth and risk. Some asset classes such as cash in the bank are focused on capital preservation. 

Your choice of asset class has to be aligned with your investment goals.

Equities such as stocks and shares offer potential to make a good capital gain on your money, but are riskier than cash in the bank. 

Physical assets such as Real Estate and Gold offer chances to grow your wealth, but there are downsides to both. Investing in your own home may be a worthwhile investment for you but purchasing an investment property may not if it means that all of your money is tied up in that property. 

Your goals is the one factor which determines which asset class you are going to invest your money in. The question which has to be asked is, “What is the purpose of this investment?”

Once you have answered this question, you are left with your risk profile.

It is important to stress that you can have money invested in growth and conservative funds in different investments at the same time without it affecting your risk profile.

Here is an example:

A person in their twenties has 40+ years till retirement, therefore an appropriate investment for their retirement fund, (Kiwisaver in New Zealand)  is growth or balanced funds.

That same person may be saving up for a car and may have less than 12 months before they have saved enough for their purchase. Investing in conservative funds is right for them, though as they get closer to the time they require the money, depositing it in an ordinary savings account may be the best option.

Time is the major factor to consider when setting your money goals. The person who has time on their side is able to invest more aggressively into growth funds because they have more time to recover from a market downturn.

This does not mean that you should invest haphazardly, but rather taking calculated risks. The beauty of investing in managed funds is that your funds are invested on your behalf by fund managers and it is their job to ensure that your investment returns a profit. 

Cryptocurrency such as Bitcoin, Ethereum, and Dogecoin are an asset class, albeit, a risky one with the potential for high returns. If you are going to get involved in this then only do so with discretionary spending money. The same applies to investing in anything which is outside of your risk profile. 

You could be aged 70 or 80 but still fancy investing in growth funds. Do this if a market meltdown is not going to affect your lifestyle. New Zealand financial advisor Frances Cook has a formula for calculating what portion of your portfolio should be allocated to shares. You simply deduct your age from 100. 

I do know of some folk who do not follow this rule, and I am one of them. My view is that I may avoid the effects of a market meltdown if I followed Frances Cook’s formula, but then I am taking advantage of a buoyant market.

Its a decision investors must make for themselves and if it all turns to custard then you have only yourself to blame. 

About this article

The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your blog/website, or ebook.

Read my other articles on www.robertastewart.com

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How Sharesies is turning ordinary people into Investors

How Sharesies is turning ordinary people into Investors

Written by R. A. Stewart

When I was young there were limited opportunities to get involved in the share market. You had to save up a certain amount of money and invest it in your chosen company. In order to diversify you had to repeat that same saving up then investing process several times.

Then came managed funds where your money was combined with other investors which enabled you to have a diversified portfolio. Not only that but you have the opportunity to choose a fund according to the level of risk you are willing to take, whether it be growth funds, balanced funds, or conservative funds.

80% of Sharesies investors are under 40. There are benefits to getting involved in the markets from a young age. They are:

  1. Young people have time on their side and therefore are able to be more aggressive with their money by investing in growth funds.
  2. Young people have more time to recover from market meltdowns. The Share market is a long term game worth taking on board.
  3. Investing from a young age will increase an investor’s financial literacy and this is an experience which they can take with them into the future.
  4. Young people do not have as many commitments so have more discretionary money to invest into the markets.

If there is one habit which should be developed from a young age it is the habit of saving and investing. Making provision for your future needs is the responsible and mature thing to do. Indeed, it is a red flag when a potential life partner pays no attention to monetary matters. As they say, “Most marriages which fail, do because of financial issues.”

People do not change their spots overnight. If they give that appearance, it will only last until they have you and then he or she will revert to their old habits.

Now and again there will be a financial guru who claims that they made a killing on the share market and are willing to share their secret with you. What generally happens is that the person who made the killing will try to repeat the effort and end up losing their gains and a lot more. Then there is the fact that for every person who made the killing, a lot more tried the same thing and lost all of their money.

Experience will give you the wisdom to know when to take what someone has said with a grain of salt. 

Never allow the fear of making a mistake prevent you from investing. It is better than you making your mistakes when you are young because they will not affect you as much as when you are older and have more commitments.

As for Sharesies, I treat it as another string to my financial bow. Here is my strategy. I choose one New Zealand company to invest in per year and drip-feed money into this company every year. Some of the companies I have on Sharesies are Spark, Genesis Energy, Fletcher, PGG Wrightson, Fonterra, and Contact Energy. I have not decided on which company to invest in 2026.

Invest according to your own personal goals and circumstances and not what others are doing. It is your responsibility to set out your finances according to your goals and not what others suggest you should do with your money.

There are some great books on personal finance available. Frances Cook and Mary Holm are two New Zealand authors whose books are worth reading so if you can obtain a copy of their books then it will steer you in the right direction.

All the best with your investing.

ABOUT THIS ARTICLE

The content of this article is of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your website/blog or ebook.

Read my other articles on www.robertastewart.com

Start investing on a shoestring

Sharesies makes it possible for anyone to get into buying and selling shares. It is an online share market platform where you have the option of purchasing shares in individual companies or in various funds (managed/mutual funds). You can even start with $5. This is a no brainer because it gives investors young and not so young the chance to improve their financial literacy. There is certainly no substitute for experience when it comes to learning and this is applicable to everything else, not just investing.

Join sharesies here: https://sharesies.nz/r/377DFM

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Stealth Wealth-What it is

Written by R. A. Stewart

“Some People look rich but are actually poor while others look poor, but are rich.”-Proverbs 13:7

Stealth Wealth is a term which I had come across for the first time recently. I had never even heard of it previously so did a bit of research into what it actually meant.

Stealth Wealth is when people who are rich are living low key lives that no one knows they are rich. They may drive a modest car and live in a modest house. These people are likely to have their money in the financial markets and other investments.

At the other extreme, there are people who display their possessions in a way which gives others the impression that they are doing well for themselves. They drive fancy cars, wear expensive clothes, and attend all of the right parties, but they have nothing to show for all of their labours. 

Those in the “Look rich” category often find that their wages are not enough to pay for their flashy lifestyle so they use their credit card. There is a cost to this and that is called interest.

The people who live in such a way as to give others the impression that they are not rich will invest their money in the share market and other income generating investments.

Notice something?

People in the first category are investing money in something which increases in value and this grows their wealth.

Those in the second category spend their money on stuff which loses value and so never get anywhere financially; they are spenders.

Years ago I was working in the hospitality industry and the head chef had bought a car for 20 grand so a colleague told me. I replied, “If that was me, I would have bought the cheapest car and invested the rest of the money.”

Possessions such as an auto-mobile often go beyond the stage when they are for going from A to B, but serve as status symbols to impress others.

People who display their wealth in order to impress others are insecure. The need to appear wealthy steals the joy from their experiences. 

There are lots of rich people but they got there by being a good steward of their resources. Those who are spenders are never satisfied with what they have so they spend more and more on luxuries in order to satisfy their lust for stuff. In order to build up your assets it is necessary to live within your means and invest your savings. 

If there are just two habits which will enable you to prosper it is the habit of saving and the habit of investing.

About this article

This article is of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your website/blog or ebook.

Read my other articles on www.robertastewart.com

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The Benefits of Investing from a Young Age

The Benefits of Investing from a Young Age

Written by R. A. Stewart

To start your journey on to financial prosperity it is crucial that you start young if you want to get the full benefits of time. Here are three benefits of investing while you are young. This does not mean that investing when you are older will not have its own benefits. Investing money at any age will be beneficial and is better than having no savings whatsoever.

Here are the main benefits of investing from a young age.

  1. Time is your Friend

When you are young you are able to make time work for you. Money invested in the correct funds will multiply and increase its value. This is called compounding and it can really increase your wealth. Not only will your original investment keep producing a profit for you but the profits whether, that is from interest or dividends will be added to your original deposit and it too, will produce a profit for you.

  1. More Time to recover from financial setbacks

The markets can be volatile with shares going up and down like a yoyo, but with the benefit of time, young people have time on their side to ride out the storm. That does not mean that people who are just retired should not invest in the share market but rather they need to ask themselves this question, “How will the loss of this money affect my lifestyle?”.

It also does not mean that young people should invest all of their money in the share market. It all depends on what the money is going to be used for. If you need the money in the short term then you need to be a little bit more conservative with your investing.

The case I am making for the young ones to be a little more aggressive with their investing is that they may not be retiring for another forty years, therefore, taking advantage of capital gains which the share market offers can pay off.

3.It is better to make your mistakes early in life

People tend to make most of their mistakes early in life. That is no surprise since lack of experience often leads to errors of judgement, but as far as investing money goes, there are advantages in making your mistakes early in life. One is that you have fewer commitments, therefore, a mistake which can result in an investment going down the gurgler will not affect your lifestyle as much as it would for a person who has a family. Investing mistakes made early in life can be used to make better judgments in future. 

Investing early in life will enhance your financial literacy and will your whole life ahead of you, there are opportunities to grow your wealth so grab it with both arms.

  1. More disposable income

As a young one you are likely to have more disposable income than someone who is older and with more commitments. If you are sensible, then investing your money will help grow your wealth. You are also likely to be in a position to take more risks with how you are investing your money, but that does not necessarily mean speculating on something which is a bit dodgy, but rather, taking some calculated risks.

  1. Habits formed early will make and break you

Developing habits which add value to your life and others will make and break you. One of these habits is the habit of saving and investing. These days it is easy to start a financial portfolio with so many investing apps available. It is just a matter of choosing one which is the right fit for your investing objectives. It is also important to set goals which align with your values and not be influenced by what your colleagues at work or your family say. It is your life and you are the one who has to live with your decisions so use the brain which God gave you and you will be better off in the long run. By all means, take note of financial advice as you will find in the business section of the newspapers but learn to develop the ability to discern whether advice is good or bad. Associate with people who have common sense. As the proverb says, “He who walks with wise men shall become wise, but a companion of fools will be destroyed.”

About this article

The contents of this article are of the opinion of the writer and may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your website/blog, or ebook.

Read my other articles on www.robertastewart.com

 

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Your Money Your Responsibility 

Your Money Your Responsibility 

Written by R. A. Stewart

Your money is your responsibility. It is your choice what you do with it once it becomes yours, but you have the responsibility of how you manage your money. Being a good steward of money means being responsible for how you use it. This requires maturity.

Here are the main factors which will help you become a good steward of money.

  1. Gaining a financial education

It is your responsibility to become financially literate. In this day and age where there is so much information available on making the most of your money, it is inexcusable to be financially literate. 

All it may take for you to find books on personal finance is to just visit your local library. If you are prepared to spend a bit of money then you may find some good books at your local bookstore.

Frances Cook, Mary Holm, and Martin Hawes are excellent New Zealand authors of Financial books.

  1. Make your own decisions

Some people will get others to make decisions on their behalf, so that whenever something goes wrong they always have someone to blame. “You told me to invest in such and such company and now I have lost my money.” It is your money so that it is your responsibility to make the most of it. 

  1. Accept your own mistakes

Investing is a learning process. In order to become a good investor you need to invest and gain experience doing so. Mistakes will be made. The important thing is to learn from them and move on. 

  1. Living within your means.

It is your responsibility to live within your means. This means that if you choose to get married, have kids, or buy a car, then it is your responsibility to ensure that you are in a suitable financial position to do these things. 

  1. Pay all of your bills

Everyone has fixed costs such as utilities, phones, and whatever. It is the responsibility and the mature thing to pay all of these on time. A bad credit rating can hurt your chances of obtaining a mortgage in the future.

  1. Save a portion of your income

It is your responsibility to save a portion of your income to provide some kind of cushion for a future financial setback. Establishing a rainy day fund is always suggested by financial experts.

  1. Listen to wise advice

The markets went up and down and they were all down after President Trump announced tariffs on overseas imports to the US. The experts in New Zealand were advising investors to remain calm during this time and not to react to the market slide by changing funds. “This is the nature of the markets,” they said. Many did change funds and when the markets recovered the losses, these people missed out on the gains. As a result, their kiwisaver balances took a hit. 

Your financial plan has to take into consideration the market volatility. The question is, “If the market dropped 5% or whatever, how will this affect my lifestyle?”

If you have ten or so years remaining till you retire then the answer is that it won’t in the short or medium term. 

It is your responsibility to heed advice when it is given but at the same time have the common sense to know whether the advice is good or bad.

Once you have gained enough experience at investing you will have the know how to discern whether advice is good or bad and what the motive is behind the person giving the advice.

About this article: The opinions expressed are those of the writer and may not be applicable to your personal circumstances therefore discretion is advised. You may use this article as content for your blog/website or ebook.

Read my other articles at www.robertastewart.com

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The Percentage Formula

The Percentage Formula

Knowing how to work on percentages is a benefit in the area of finances.

If you are figuring out the return of your investments, you will need to know how to calculate percentages. 

Here is an example:

Your return on an investment of $100 is $7. The formula for working out your return in terms of percentage is:

(a) 7 multiplied by 100 =700

(b) The answer is a being divided by 100= 7%

Your return $7 is multiplied by 100

Your investment of $100 is divided by 700

Shirley has $5,000 in her personal savings account and has received $100 in interest off that money. In terms of percentage, what is her return on that money?

(a) $100 multiplied by 100 =$10,000

(b) 10,000 divided by 5,000= 2

Shirley has received 2% interest on her money.

This formula does not include tax so supposing Shirley pays 17.5% tax.

The formula for working out the tax which needs to be paid on interest is straight forward; it is:

Interest received (income) multiplied by the individual’s tax rate (17.5%).

In Shirley’s case, this is $100 multiplied by 17.5% equals $17.50.

Her net return on her money is $82.50.

17.5% is 0.175

An example such as this shows us the futility of just leaving your money in the bank without investing it. The combination of inflation and taxation means that those who do not invest are losing the value of their money. 

Saving money is a good habit to get into, but it is also important to get into the habit of investing. This increases your financial literacy.

Some people do not invest their money because they are afraid of losing their money, yet they will buy lottery tickets which is a sure-fire way of losing. 

Knowing how to figure out percentages is a skill which will assist you in different areas of your life.

Here are some examples of where knowing how to calculate percentages will be a valuable skill.

Shopping & Discounts: Calculate discounts during sales (e.g., “30% off”).

Tips & Service Charges: Determine how much to tip at restaurants (e.g., 15% or 20% of the bill).

Tax Calculations: Compute sales tax (e.g., 8% tax on a purchase).

Budgeting & Expenses: Track spending (e.g., “20% of my income goes to rent”).

Loan & Credit Card Interest: Understand interest rates on loans or credit cards.

About this article:

You may use this article as content for your website/blog or ebook. 

www.robertastewart.com

Posted on

Difference between good debt and bad debt

Good Debt and Bad Debt 

Written by R. A. Stewart

Do you know the difference between good debt and bad debt? One needs to be used with caution while the other is to be avoided like the plague.

First the basics.

When you are borrowing money you are paying for the use of that money and that is called interest. This adds to the cost of what the money is used for. Therefore, it is important that you save and use your own money if at all possible.

There are some things which it may not be possible to use your own money such as a student loan or a mortgage because these are major investments, however, most people will contribute a portion of the money needed such as a house deposit.

Good Debt

Listed below are things which are considered to be good debt:

A Student loan

Mortgage

An investment with a higher expected return

Good debt helps to build your wealth.

Listed below are things which are considered to be bad debt:

Bad debt

Vehicle

Household appliances

Veterinarian bills

Travel

Consumables

The reason why these are bad debts is because you end up with little or nothing for your money.

Bad debt does not contribute to your financial well-being, it is detrimental to it.

It is important to know the difference between an asset and a liability. An asset increases your wealth while a liability reduces it.

How to manage debt levels

Pay off debt as fast as possible

Avoid paying high interest rates for consumable items

Stay within your budget

If you don’t have the money you don’t buy it.

Build an emergency fund; this would be a separate bank account from your every day personal account. An emergency fund will ensure that you have money on hand for anything unexpected which crops up.

People with debt do not have any discretionary spending money. These people will probably disagree, but honestly; going on an overseas holiday when one owes money to someone is irresponsible and selfish. It is like giving the middle finger to your creditors.

One should avoid credit cards like the plague. These are for greedy and selfish people. A good money manager will not own a credit card, because to them, “debt” is a dirty word.

Learn to live within your means and to stay within your budget. Prosperity is a matter of choice. If you don’t have any plan for increasing your wealth then you choose not to be wealthy. I do know of many people like this who purchase a lottery ticket every week and that is their only hope of becoming wealthy.

Do not envy those who drive around in a fancy car and live in an expensive house. For all you know these people could be up to their eyeballs in debt. Just live according to your own means and let others do the same. 

To summarise

Good debt is when you borrow for an asset which has a payoff which makes it worthwhile paying the interest for the loan. Bad debt is when you borrow for something which has no lasting value.

About this article

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Check out my other articles on www.robertastewart.com

 

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