Avoid Bad Debts In Investing





To plug a hole in your savings, beware of these loans.

Living in the present is an infinitely prudent outlook to life, but when it comes to your finances, you may need to alter this vision. To secure your future, it is important to learn the art of delaying gratification and considering the impact of your actions.

This is the reason debts are an anathema to most successful people. While some loans, such as those for home and car, are virtually inevitable, the financially prudent prefer to be rid of these at the earliest. I had taken a home loan and two car loans, but prepaid all several years before their respective tenures. Like him, Samarth Sharma has also prepaid his loans. Even the so-called good loans may be a bad idea if you can't afford them. Beside, stretching loan tenures is not advisable as it balloons the interest cost despite the tax advantage that some of them offer. So, it is best to prepay at the earliest and avoid unsecured loans at all cost.

The `bad debts' typically include personal loans and credit card payments. These can erode your financial worth in the guise of instant gratification (see graphic) because of their high interest rates and charges--36-48% per annum for credit cards and 20-24% for personal loans. So make sure you never roll over your credit and avoid paying the minimum due amount. Take a loan against your existing investments instead of a personal loan, if you must.

IF YOU DON'T, YOU SUFFER FROM SELF-CONTROL BIAS

As the name suggests, you lack discipline, which is the reason you spend excessively on your credit card or overlook the long term goals in favour of your current needs and pleasures. You prefer smaller gains now to bigger pay-offs in the future.

HOW TO OVERCOME IT:

The best way to conquer this bias is to take the decision out of your hands. So if credit card is your weakness, get rid of it. If you cannot save for long-term goals, automate payments so that you save before spending. It will also help to strictly follow a budget by writing down your expenses, savings as well as investments.