Firstly, I can identify all my bad debts and try to convert them into good debts. For example, I own a car but I rarely used it. I could rent it out to earn rental income. This rental income would be used for covering my car loan. In this way, I had converted a bad debt to a good debt.
If I failed to find someone to rent my car, I would try to settle my bad debt as soon as possible. Using the previous example, my car loan is a bad debt because every month I would need to service the loan repayment. Since I rarely used the car, then it is better for me to sell it off to pay off my bad debt.
Secondly, I need to do proper financial planning for all my good debts since there is a danger at any point of time a good debt become bad debt. Learning from the Rich Dad’s series by Robert Kiyosaki, it is important to good debts to accumulate wealth. But how many or how much good debt should I be taking on?
For example, if I were to borrow from a bank to invest in property, I would incur debt. Since my property was on rental and the monthly rental income was more than the monthly mortgage loan repayment, then my debt was essentially a good debt.
Assuming I had bought a property valued at $200K and I had loaned at 80% of the valuation price, then my good debt would be $160K. Now there were two possible scenarios that my good debt could change into bad debt.
The first scenario is that my tenant stops to lease my property and thus there were no more rental income. Without anymore rental incomes, then my debt would become bad debt. And then, I need to service my mortgage loan all by myself.
A precaution based on my financial education, it is necessary for me to set aside 3 to 6 months of expenditure including mortgage loan repayment. If such a scenario were to happen, I have to be able survive for at least 3 to 6 months. This period should be long enough for me to find new tenant or sell off my property.
If I failed to find someone to rent my car, I would try to settle my bad debt as soon as possible. Using the previous example, my car loan is a bad debt because every month I would need to service the loan repayment. Since I rarely used the car, then it is better for me to sell it off to pay off my bad debt.
Secondly, I need to do proper financial planning for all my good debts since there is a danger at any point of time a good debt become bad debt. Learning from the Rich Dad’s series by Robert Kiyosaki, it is important to good debts to accumulate wealth. But how many or how much good debt should I be taking on?
For example, if I were to borrow from a bank to invest in property, I would incur debt. Since my property was on rental and the monthly rental income was more than the monthly mortgage loan repayment, then my debt was essentially a good debt.
Assuming I had bought a property valued at $200K and I had loaned at 80% of the valuation price, then my good debt would be $160K. Now there were two possible scenarios that my good debt could change into bad debt.
The first scenario is that my tenant stops to lease my property and thus there were no more rental income. Without anymore rental incomes, then my debt would become bad debt. And then, I need to service my mortgage loan all by myself.
A precaution based on my financial education, it is necessary for me to set aside 3 to 6 months of expenditure including mortgage loan repayment. If such a scenario were to happen, I have to be able survive for at least 3 to 6 months. This period should be long enough for me to find new tenant or sell off my property.
The second scenario is that the valuation price of my property suddenly drops to $100K. Assuming that the bank only allowed me to borrow at a maximum limit of 80% of the valuation price, then the loan I could only borrow is $80k. Thus, the bank would force me to top up the difference of $80k. If I failed to do so, then it would be considered to be a default on mortgage loan. The bank then has the right to sell off my property to reclaim the loss.
If I had more than one property, then I would be having a much worst financial situation when the second scenario occurred. This is where financial education can plays an important part as highlighted by the Rich Dad Series by Robert Kiyosaki. With my financial education, I could determine how many and how much debts that I could take on without running into the risk of becoming bankrupt if the situation were to turn against me. That is why I should not be overstretching myself with too many good debts. I would borrow within a reasonably safe limit.
If I had more than one property, then I would be having a much worst financial situation when the second scenario occurred. This is where financial education can plays an important part as highlighted by the Rich Dad Series by Robert Kiyosaki. With my financial education, I could determine how many and how much debts that I could take on without running into the risk of becoming bankrupt if the situation were to turn against me. That is why I should not be overstretching myself with too many good debts. I would borrow within a reasonably safe limit.
For Your Financial Freedom
Lay Peng
P.S: Mr. Robert Kiyosaki has his Rich Dad as his mentor while I have him and other Top Speakers and World Class Gurus as mine.
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