Playing with ‘Borrowed’ risk. Are you one of them?

I read an article on how banks should keep themselves safe and not cause another financial crisis. It said that because banks lends out way too much of their money compared to their actual ‘capital’/equity’, it will become unstable quite easily should their loans they gave out or the investments they invested depreciated by just a little. For example, perhaps a small but prolonged financial crisis which caused property prices to drop 10%? I do not think the banks would listen to this advice to somehow invest / borrow lesser than today and to ensure the capital / equity they have is much higher. This is bank. What about us?

debtsHow many of us have credit card debts that we are continuously servicing instead of resorting to paying it off soon? Due to the compounding effect of the debts plus the interest rates they charge is up to 18%, it meant that very soon you would have to restructure it or face bankruptcy. Think about it, how many times have we bought something we could not afford but because we have a credit card, we told ourselves that ‘I can easily pay for it over 6 months’? If you have only bought ONE item this way, I think you are still okay. Problem starts when you have ONE item purchased this way every month for 6 months. Suddenly you needed 6 months x 6 months!

Image source: http://www.advisorperspectives.com/commentaries/matthews_090513.php

How many of us went to view properties that some of our ‘richer’ friends bought. I said ‘richer’ because your friends may also be buying that property because they were also looking at their ‘richer’ friends. Have you ever calculated how much you can really afford? Once you have done that, move one level lower. Say 20% lower. By doing this, you have just taken a calculated risk. Yes, buying property comes with risk but if you take a calculated one, even if the property prices went down by 20%, you are, on paper still ok and your mortgage repayments, safe.   A 1,200sf condo may be 20% more expensive than a 1,000sf one but the truth is, if you do not keep loads of rubbish, you can afford to stay comfortably in that 1,000sf condo instead of the 1,200sf one.

How many of us tried to renovate and furnish our properties with the best stuffs because we got taste? The lightings on top of the dining table of the highest quality, the sofa which has a warranty of 10 years, the biggest LED TV you can buy because enjoyment is a must and a 10kg washing machine which costs a bomb today because you wanted to plan for the future? For the lighting, trust me, no one notices it after a while, not even YOU. For the sofa, are you going to use the EXACT SAME SET OF SOFA FOR TEN YEARS?  LED TV is the best, every 3 months, prices come down. 10kg washing machine to future proof your growing family? Do you even know that buying a smaller one today and buying a bigger one 5 years down the road meant you gain MORE?

We may have let our guards down because we did not know about it yesterday. The question is, since you now know a little bit today, would you do something about it for your tomorrow. Are you living on a ‘borrowed risk’ life or would you like to live on a ‘calculated’ one instead? Oh yeah, both remain to be risks. If another huge financial crisis comes tomorrow, only those who kept cash may be better off. However, if no huge crisis comes within the next 5 years, based on the above, you have already two properties and by the time you retire, perhaps even 3 or 4 properties. Happy investing / buying, ‘calculatively’.

 

written on 19th Sept 2014

Next suggested article: Demand vs Supply, Location and Price, Your Decision. 

4 thoughts on “Playing with ‘Borrowed’ risk. Are you one of them?

  1. Personally, I think it was okay to leveraged on bank loan. However, you must do your homework. I will compare all similar product offered by different bank, read the terms and conditions, call the hotline, work out your own repayment scheme, bring your own repayment scheme to bank and speaks to bank officer ensure no surprises, set aside the emergency fund just in case, work harder to pay/save more to pay back the bank or grow your emergency fund.

    Importantly, invest in yourself in financial literacy.

    While you improve in financial litercy, you can protect capital of your own.

    Happy Hunting.

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