CFA Society The Bahamas Financial Literacy Society The Ba · PDF file Loan • Credit...

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Transcript of CFA Society The Bahamas Financial Literacy Society The Ba · PDF file Loan • Credit...

  • CFA Society The Bahamas Financial Literacy Good Debt vs. Bad Debt

    www.cfasociety.org/bahamas

  • www.cfasociety.org/bahamas

    What is Debt?

  • What is ‘Debt’

    Dictionary.com defines debt as: Noun 1.  something that is owed or that one is bound to

    pay to or perform for another 2.  a liability or obligation to pay or render

    something 3.  the condition of being under such an

    obligation www.cfasociety.org/bahamas

  • www.cfasociety.org/bahamas

    Debt Picture in The Bahamas

  • www.cfasociety.org/bahamas Source: Central Bank of The Bahamas

    Bahamas has $2.3Bn in Consumer Debt Outstanding as at Sep 2017

    $156M is Past Due

  • www.cfasociety.org/bahamas Source: Central Bank of The Bahamas

  • Good Debt vs. Bad Debt

    www.cfasociety.org/bahamas

  • What is ‘Good Debt’

    •  Good debt is an investment that will grow in value or generate long-term income.

    •  Good debt “pays for itself” – The funds that are borrowed are placed in an

    investment that generates sufficient return to both a)  repay the original amount borrowed, plus the

    cost of said debt; and b)  provide additional value for the owner

    www.cfasociety.org/bahamas

  • www.cfasociety.org/bahamas Source: Central Bank of The Bahamas

  • What is ‘Bad Debt’

    •  Bad debt is debt incurred to purchase things that quickly lose their value and do not generate long-term income.

    •  Bad debt may also be considered debt that carries a high interest rate.

    www.cfasociety.org/bahamas

  • www.cfasociety.org/bahamas Source: Central Bank of The Bahamas

  • Good Debt vs. Bad Debt Good Debt Bad Debt

    •  Small Business Loan

    •  Loan to purchase shares

    •  Land Acquisition Loan

    • Credit Card Debt •  Vacation Loan •  Payday Loan • Cash Advance

    Loan • Car Loans

    www.cfasociety.org/bahamas

  • Good Debt vs. Bad Debt

    www.cfasociety.org/bahamas

    •  Grey Areas: – Home Loan – Debt Consolidation Loan – Education Loan

    •  School Fees •  University/Special Skills Education

    – Credit Card Cash Back/Rewards Programs

  • Appropriate Levels of Debt

    www.cfasociety.org/bahamas

  • Debt Level (Advanced vs. EM Countries)

    •  In an October 2017 report, on the subject of Household Debt and Financial Stability, the IMF opined that:

    “although finance is generally believed to contribute to long-term economic growth, recent studies have shown that the growth benefits start declining when aggregate leverage is high”

    •  The report mentions that household debt-to-GDP is higher in advanced economies (approx. 60+%), whereas household debt-to-GDP in emerging market economies is lower (approx. 20+%)

    www.cfasociety.org/bahamas

  • Debt Levels (Advanced vs. EM Countries)

    •  The same report states that during 2016: “... In the highest quartile, the household debt-to-GDP ratio fell only slightly from 88 percent to 86 percent in advanced economies and continued to rise from 28 percent to 32 percent in emerging market economies.”

    •  Using The Bahamas 2016 consumer debt of $2.37Bn vs. a GDP of approx. $10Bn, household debt-to-GDP is approx. 24 percent –  Slightly higher than avg. EM household debt-to-GDP

    level

    www.cfasociety.org/bahamas

  • Debt Levels (Advanced vs. EM Countries)

    •  Is this a bad thing? Not necessarily

    •  The IMF Report goes on to say: –  “On average, an increase in household debt boosts

    growth in the short term but may give rise to macroeconomic and financial stability risks in the medium term...the negative medium-term consequences of increases in household debt are more pronounced for advanced than for emerging market economies.”

    www.cfasociety.org/bahamas

  • Household debt Total, % of net disposable income, 2015

    www.cfasociety.org/bahamas

    Source: OECD (2018), Household debt (indicator). doi: 10.1787/f03b6469-en (Accessed on 08 February 2018)

  • Household debt Total, % of net disposable income, 2015

    www.cfasociety.org/bahamas

    Source: OECD (2018), Household debt (indicator). doi: 10.1787/f03b6469-en (Accessed on 08 February 2018)

    Bahamas – approx. 230%

  • What is an “appropriate” level of Debt?

    www.cfasociety.org/bahamas

    •  Central Bank of The Bahamas guidelines recommend a 45% TDSR for individuals

    •  What is “TDSR”? – Total Debt Service Ratio (TDSR) is the

    percentage of household income dedicated to meeting debt repayment obligations

    •  Many households with TDSR’s above the recommended level struggle to meet their monthly repayments due to other commitments (e.g. utility bills, rent, groceries, etc)

  • Debt Management Strategies

    www.cfasociety.org/bahamas

  • Strategies to manage debt

    •  Minimize the use of debt to purchase consumables

    •  Avoid high-interest rate debt and excessive fees – Reduce and eliminate high-interest debt

    •  Prepay debt where at all possible •  Plan and save for “big-ticket” purchases •  Create a budget to track spending as well as

    debt service

    www.cfasociety.org/bahamas

  • Conclusion •  Debt is a tool

    – Used wisely, it can help to create wealth and improve standard of living

    – Used unwisely, it can lead to financial challenges and ruin

    www.cfasociety.org/bahamas

  • www.cfasociety.org/bahamas

    Thank You