You’ve heard it all before:
“Don’t spend what you don’t have”
‘Don’t bite off more than you can chew.”
“Live within your means”
However more often than not it’s easier to become immune to all these sayings and casually do just the opposite without giving a second thought to the long term consequences.
Taking on debt for investment purposes to: get an education, start a business or purchase real estate, is considered ‘good debt’, but as Oscar Wilde said “everything in moderation even moderation”: this principle applies to ‘good debt’.
Surpassing your debt threshold in order to get a business off the ground or to acquire assets could land you in a precarious ‘cash strapped’ position. University degrees don’t always lead to six figure salaries, start-up businesses usually encounter challenges in the early stages and real estate investments can take some time before they start to generate cash flow or appreciate in value.
There is no fool-proof formula to help you determine when ‘enough is enough’ where debt is concerned, but as a guideline, you should limit your personal debt ceiling to no more than 40% of your gross income.
Of course there’s always potential for gratifying returns and huge success stories always come with tales of taking risk but things can go wrong. Ask yourself these questions before pushing debt beyond your limits
- Am I suffering sleepless nights worrying how next month’s bills are going to be paid?
- Am I still in a position to save towards all my meaningful goals?
- Do I have enough cash set aside for an emergency?
There’s no point in making an investment without expectation of a positive return so here are four essential tips to help you stay in the black and sleep well at night.
- Determine your personal ‘debt ceiling’ and know when to stop
- Avoid piling up credit card debt that rolls over month to month
- Understand how your credit report can impact your financial future
- Remember cash is king.
It’s important to have skin in the game but it’s most important to be able to stay in the game.