Are You Trapped in a Virtual Debt?
Have you ever been in a situation where you are saving something to buy, but do you decide to buy it using a loan / EMI route? see flat-6.net for further notes
If NO, hopefully you expect the right approach to your financial life.
If the answer is YES, you are a virtual debt. And you’re not alone.
What is Virtual Debt?
It’s in a state where you have a debt that you can take care of for your savings, but you decide not.
In other words, you are in debt while your net financial situation shows otherwise. This is different from the case where you take a loan / EMI because you have a lack of money.
The reason for the virtual debt can be a lot – “promise” of income that is higher than the interest you pay, discomfort if you see that your savings fall below a certain level, the tax benefits that you can get, or the usual laziness, you find it too difficult to estimate the EMI pros and cons.
This debt can usually be avoided. However, you have to think for yourself if the virtual debt is good for you or not.
Examples of Virtual Debt
- Taking a personal loan for a foreign vacation (say a 200,000/3000 euro loan @ 12% per annum) and we hope that the same amount in your investment funds will be provided by the “Guaranteed” 15/20/25% annual returns. (May or may not happen!) – Improving a loan for repairing your house, but it does not concern your equivalent savings, because it is a fund of unforeseen costs and you must have access to it at any time. (although it is good to have an emergency fund, you decide that it is wise to take a loan – maybe or not!) – buying the latest iPhone from EMI because – hey, it’s available in simple EMIs ! (Huh!) – your credit card invoice by default because you do not have enough on your savings account and you do not want to cancel your specific deposits!
(You may also be interested in the worst debts and loans you should avoid).
What are the benefits of virtual debt?
Although debt is usually avoidable, there are cases where it is useful to find debt. (Everyone own!) . Here are some possible benefits in these cases.
– You can keep your contingency fund intact, which can be useful in an unforeseen emergency. In some cases, your available interest rate is lower than your return on investment (unlikely but possible. “Guaranteed” 15 or 20 or 25% “promised” returning from stock markets in this) – in some cases, it may give you tax benefits – eg home loan / student loan
What are the disadvantages of virtual debt?
- You pay more than you pay for the interest you pay .- More often, debt is something that can be avoided – eg. rebuilding a car, buying a high-end smartphone or some other gadget, a luxury holiday, etc. Debt collection may soon become a habit. And before you realize you have a permanent EMI trap (until you take the effort to break this EMI habit, and this habit is not easy to break)
(You may also be interested – Prerequisites for Investment and Financial Management)
Usually you must avoid virtual debt, but in some cases it may be useful. So, do your math and judge yourself if such debt gives you something good.
Have you taken out a debt if you could have avoided it? Maybe you need to think about whether it is worth wearing a virtual debt…