Debt Financing Manoeuvres

Businesses can finance their endeavours by debt, other than equity. In personal finance, debt should be considered with the same cold financial lens as you would do so in business. Therefore the main concept is as follows:

Debt financing manoeuvres make sense only when you can reasonably expect returns to be more than the interest charged on the debt. i.e If the interest on the loan is 4%p.a, you ought to be confident of generating more than 4%p.a on the use of those borrowed monies.

Under such a logic, one really should not be taking on debt for a fine dining experience. Debt fuelled lifestyle choices cannot last indefinitely and will only harm your personal finances in the long run. That short term personal gratification will eventually be replaced with slavery to the racked up debt.

Precisely under this same logic, repaying existing debt such as housing mortgage is another investment option compared to shoving monies into fixed deposits. Banks typically loan out depositor monies at higher rates to earn the spread, therefore the returns on repaying existing debt, very likely exceeds returns from fixed deposits.

That said, I must qualify that such a direct comparison is trading off liquidity needs for better returns. Fixed deposits and Singapore Saving Bonds are 2 great ways to park emergency liquidity funds.

Liquidity is a double edge sword like debt.

We all know the ill effects of illiquidity in emergencies and financial crunches. But too much liquidity also means one is not making monies work hard enough. So for low risk investors, establish the amount of liquidity you need, use the excess to pay down debt if you have. It’s sound financial advice. Want more? Speak to Isaac. 9730 6977.

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