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This is the second post in our two articles on how debt can affect your financial planning.
Yesterday we focused on the dangers of bad debt and how it could derail your financial planning for the future.
Today we look at why not all debt is a bad thing and how some forms of borrowing are a sensible investment in the future and how ‘good debt’, alongside sensible financial planning can help you meet your aspirations and enhance your lifestyle.
Good debts are loans for important, life-changing and necessary items. Good debts are properly structured with affordable repayments and more manageable interest rates.
A well-planned and researched mortgage for a property purchase is an example of a good debt that enhances someone’s lifestyle. Under normal economic circumstances purchasing a home adds a valuable asset that over the long term should appreciate in value.
However, even good debts need effective management. When taking out a mortgage you need to consider not just the size of the loan, but also the term of the repayments which combined will determine the size of the monthly repayments. Paying off a property loan in 10 years may sound great but if the payments are too high to give you financial breathing space to fund other elements of your lifestyle it may making meeting the payment schedule difficult and incur penalties. Better to increase the term of the loan to 15 or 20 years rather than make commitments that are difficult to meet.
Student loans are another example of good debt. Taking out a loan for further education is likely to lead to better work and life opportunities. It is an investment in a better future. It is a consideration for parents to keep this in mind when considering helping out their children. If providing financial assistance for their education jeopardises a financially secure retirement then making too great a contribution to the costs of education is foolhardy. Financial planning for education costs must strike a balance between student loans, parental contributions and the financial stability of both the parents and the children.
Saving and investing for the future is a vital part of good financial planning, but it is pointless setting up major savings schemes if the value of any savings plan is negated by payments servicing bad debt. It doesn’t make financial sense. At Infinity we take a holistic view of clients’ financial situation; looking at their assets and liabilities including an assessment of their debt burden. Whatever the prevailing circumstances, we can help improve anyone’s situation through a realistic assessment and good financial planning advice.
Debt is inevitable in this day and age; with common sense, some good advice and sound planning, debt can become a useful management tool rather than a crushing financial burden. If you feel you could benefit from our advice please contact us for a fee free consultation from an understanding, friendly and professional adviser.