After hearing sob stories about consumers who took on far more debt than they could comfortably carry, some people have decided that living a debt-free life is a smart way to go.
They now believe that when it comes to avoiding money trouble, total abstinence is the key. As Shakespeare's Hamlet says: Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.
Money gurus who advocate for financial freedom will readily agree with the advice, but certainly not Rajvin Jacob.
Three months ago, the Indian expatriate borrowed Dh140,000 to purchase a property in his home country. The acquired land lies in the state of Karnataka where real estate prices soar faster than his savings.
The loan is to be repaid within five years on a fixed 4.5 per cent annual interest, costing Jacob Dh3,000 a month. While he loses 25 per cent of his monthly pay to the loan, the 30-year-old married expat is confident that he would recoup his capital and enjoy huge returns — if he decides to sell it.
"I chose to invest the loan in real estate because it never depreciates. It only goes up. In about two years, the value of the property would rise by at least 20 to 30 per cent," he says. "So, if I sell it, I will get more than what I paid for. It's truly worth it."
Jacob is a big believer of the financial benefits of good debt, or using borrowed money as leverage to build wealth.
"Money breeds money, I guess," he says. "If you invest what you borrow and you do it at the right time, you can reap good returns. Even if you have some savings, it would still make financial sense to take a loan and keep your cash reserves intact or use it for something else. I think that's more prudent."
It's not only average-income earners like Jacob who follow the same common-sense wisdom. Even the world's famous billionaires have, at some point in their lives, used debt to amass even greater wealth.
Some say that if Sam Walton were alive today, he would have been the richest man on earth. The founder of one of America's homegrown value retail chains, Wal-Mart, barely had cash when he forayed into business.
At 27 years old, he loaned $20,000 from his wife's father and dipped into his $5,000 savings to acquire a store in Arkansas. His business later grew and he eventually opened more outlets. When it was time for a bigger expansion, he again borrowed funds and used the proceeds from his first stores to open more.
He may still be alive, but Donald Trump has one thing in common with Walton: he has used lenders' money to enable his businesses to flourish. This real estate tycoon, also popularly known in television for The Apprentice, has borrowed funds from creditors, incurred some $900 million (Dh3.3 billion) in personal debt and filed for bankruptcy four times, yet he was still valued by Forbes this year at $2.7 billion.
It's safe to say then that not all kinds of debt are bad — inefficient debt management is.
In the words of James Thomas, regional director of Acuma Wealth Management, debt is not necessarily a bad thing. "Bad management of debt or over committing to a loan you cannot afford or simply living above your means can all lead to a difficult situation. There is no hard and fast rule to borrowing money, but simply using common sense is a good guide."
In fact, good debt can be a perfect tool to acquire something when inflation is running high. "It may be worth considering borrowing money to purchase an item that in a few months could cost you more than the interest you are paying on the money you borrowed," adds Gurnos Stonuary, business services director of Nexus Group.
Borrowing money has been an essential part of life for most UAE residents. In August 2010, about 85 per cent of consumers in the country had loans. Unfortunately, debt overwhelmed some borrowers. Last year's data showed that one in every 20 cheques issued in the UAE had bounced.
Borrowing can drive people to despair
Going by the argument that good debt is beneficial, you can go ahead and borrow money, but only do so if you can afford to repay it. It's important to consider that debt in the UAE comes with other risks as well.
A loan can get you tied to your employer and lock your residency in the UAE. It can hinder you from making decisions about your future, or from improving your lifestyle and taking on other employment opportunities.
"Debt drives some people to despair and to the point of taking their lives," warns Steve Gregory, managing partner at Holborn Assets.
What bad debt can give you:
- Uncertain future
- Lack of financial freedom
- Lack of employment opportunities
- Constrained lifestyle
- Prison term
Some bad spending habits to avoid
Even if you don't borrow a lump sum, it doesn't mean you're safe. Your spending behaviour can still lead to bad debt and if you don't pay attention to the small things you pay for, your personal finances will likely head south.
Some general rules to live by:
- Don't spend more than you make. If you earn Dh5,000 a month, ensure that your total monthly outgoings will not exceed that amount.
- Cash is king. Whatever it is that you buy regularly — groceries, meals, petrol — pay it in cash. You might think that charging Dh100 on a credit card is harmless, but if you spend Dh100 here and there, your dues and interests could pile up.
- Don't rotate credit card payments. Paying off your Visa with your MasterCard won't solve your problem. Eventually, your bills will catch up to you and you'll end up with three or four maxed out cards.
- If you really have to use a card, don't spend more than 30 per cent of your credit limit.
- Never mistake want for need. Before you take that expensive, gorgeous sofa home, decide whether you really need it.
