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Using Good Debt To Power Your Financial Independence

It takes money to make money. It also takes money to invest in our own capabilities. Are you giving yourself the best chance at true financial independence?

February 15, 2022 / 12:20 PM IST

Financial independence. That's the dream, right? Creating a future where we don't need to depend on anyone, or anything, not even our jobs, to take care of our expenses. Sounds impossible? Not if you create enough investments that bring you long-term and consistent passive income (income that doesn't need you to work for it!).

The first step towards financial independence is achieving a level of earning that allows us to save. While that can be incredibly challenging in our 20s and early 30s, a little bit of good debt can go a long way in kick-starting the passive income engine. As the old adage goes, it takes money to make money.

But is there such a thing as "good debt"? For most of us Indians, no debt = good debt. Not so. Good debt is defined as money owed for things that can help build wealth or increase income over time, such as student loans, home loans, or a business loan. Think about it. A strong education, particularly from a reputed university with a strong placement program can catapult your earnings to the next level. The average salary for a graduate in India is just Rs 3,00,000 a year, whereas an MBA from a reputed institution can start you out at upwards of Rs 20,00,000 per annum. That's 600% more, in just 2 years. How quickly do you think you'll pay back that education loan, with that beautiful salary?

Similarly, a well researched property investment can set you up really well. Let's say you're paying Rs 25,000 per month as rent. That is money you'll never see again, and it generates no returns whatsoever. On the other hand, if you pay an EMI of the same or slightly higher amount, it pays for a house you'll own in a few years! For instance, if you can afford to pay roughly Rs 30,000 as EMI, that's the EMI of a 25 year loan of Rs 40,00,000 at 8% interest. You may think you'll find nothing in that amount, but look around. Do a little research online, reach out to a broker or two, and get a feel for what sort of property you'll find in that budget. If you need to bump up your budget, do so, and maybe get a flatmate for a couple of years who will pay you rent. Remember, your rent goes up each year, but unless interest rates change dramatically, your EMI stays the same! It's a win win!

If you run a business, you already understand how crucial timing can be. If you have an opportunity today, don't wait till you've saved enough money! The opportunity definitely won't wait for you! If you have a solid plan, and are willing to put in the work, taking a chance on yourself can really pay off. Once again, do your research and find a loan that works for you. Research insurance products that you can use to insure against losses, and take the plunge!

But isn't debt a bad thing?

Only if you don't pay it on time. Taking a loan, especially one that helps you get a better start, or improve your ability to earn is never a bad thing unless you fail to pay your EMIs. That is when you face late fees and additional interest. That's how credit card debt can also spiral: when you only pay the minimum amount each month, you're leaving behind a large amount to be paid later, which you are charged interest for. Each month, you've got a larger bill.

Interest and late payments have a way of adding up really, really quickly - whether it's on your credit card or your overdue loans. This doesn't just hurt your financial health, but also your credit score, which then makes it harder for you to get loans. However, if you make it a habit to pay all you "owe" each month, you'll be just fine. In fact, it can even be a profitable habit when it comes to credit cards: if you set up a standing instruction to pay everything each month, you get all the convenience of a credit card, with none of the costs! In fact, using a credit card this way is a great way to build your credit score.

A strong credit score becomes really important when you try to bring some good debt into your life. Say you want to study abroad, or start a business, or buy a home; each of these will involve a loan. Your credit score will determine who gives you a loan, and at what rates of interest. The higher your credit score, the better your options!

Understand your credit score, so you can avail good debt

Credit scores, worldwide, are a measure of your creditworthiness. In simple terms, they measure how good you are at paying your debt, on time, and without follow up. This 3 digit score (between 300-900) is used by all lenders to assess whether they should give you a loan. By and large, credit bureaus look at your payment history, and your spending habits (particularly how much of your credit card limit you use). Over a period of time, these create a trend that shows what sort of borrower you are.

Always check your credit score before you apply for loans to avoid surprises! OneScore app is great for checking and managing your credit score for free. Not only does it tell you your credit score by CIBIL and Experian (credit bureaus), it also has an AI-powered score planner that studies your particular case and gives you tailored insight on how to improve your credit score. OneScore was founded by a team of seasoned bankers, who created OneScore for the sole purpose of helping people manage their credit score and avail credit to better their lives.

Once you start building your credit score, good debt options open up to you, paving the way for greater opportunities. Download the OneScore app and use it to keep yourself on track by regularly asking yourself #ScoreDekhaKya and you'll be well on your way to a strong credit score, good debts, and a stronger financial future!

For more articles, information and tips, visit our page #ScoreDekhaKya.

Moneycontrol journalists were not involved in the creation of the article.
Tags: #Features
first published: Feb 15, 2022 12:20 pm