One thing is for sure. Debt is costly.
If I take a $50k loan to fund my wedding, at 5% for 10 years, I would pay $13k in interest.
But if that $50k had been saved or invested at 5% for 10 years, I would have ended up with $81k, or over $31k in interest.
That is the power of debt. It is a train that goes in the wrong direction.
Runaway train (going the wrong way)
If you want to get to Pasir Ris but you get on a train headed to Joo Koon, you have to retrace your steps to your starting point before you can get started.
In the same way, debt doesn’t only stop you from saving and investing. It moves you in the opposite direction and pushes your starting line further away.
This means that the cost of debt isn’t just the cost in interest.
It is the cost of the potential interest and returns you could have earned.
It is the cost of maintaining a stable emergency fund.
It is the cost of being unable to go on a nicer trip or to fly in a nicer class or stay in a fancier hotel.
And it is the cost of sleeping soundly at night. Debt can inflict a heavy psychological toll.
Only take on debt that is worth it
I’m not saying that you shouldn’t take on debt. That would be throwing out the baby with the bathwater.
Instead, be aware of the cost that debt exerts. It has a high bar to clear. It’s okay to have some debt.
We commonly call student loan debt or mortgage debt “good” debt, because these are loans for basic needs that tend to pay off well in the future. Student loans enable us to get education, boosting our future earnings. Mortgage debt is secured against the house and often gets a low interest rate, while enabling us to have housing security and ownership.
When it comes to less necessary things like renovations and weddings, think long and hard about whether it is worth it.
Should I take on debt?
I can’t tell you how to live your life.
All I can say is that you should consider the cost of the loan, not just in interest, but in opportunity cost as well.
You might want to consult my financial checklist to see if your money health is in good condition before considering taking a loan.
And make sure you are saving and investing appropriately.
Once those hurdles are cleared, you can begin exploring your options.
Good luck out there!
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