Debt can be a positive force if used properly
The term “debt” can be a very scary word. The fear is that it will bring bad things to your life. The reality is, though, that debt can be a positive force if used properly. The following article will explain the difference between debt and money (aka cash).
What does money feel like? It feels like something else. You might be used to holding money in your hand for hours at a time. But most people rarely touch actual money more than once or twice in their lifetime. Even when they do, they may not even realize it. If we think of money as something tangible and familiar, we may feel it more strongly than other things in our life — such as friendship, family or a pet. When you think of money, you make an association with what you see in the financial press rather than with the real world — where most people live. In this context, money has become something that seems threatening and dangerous because of the way its usage is portrayed in the mainstream media. However, there is another way of thinking about the world which highlights its benefits instead of its negative aspects.
The purpose of this article is not to tell you exactly how you should use your cash but rather how you should think about using it if you do want to use it — and whether or not it will make sense for you in your life — given that I have been doing this for 11 years now (I’m 46) and I have been through many different stages since then (e.g., managing my finances on my own before turning my wife into my financial manager). It’s also important for me to emphasize some crucial distinctions between debt and cash because many people are confused by them when they first hear about them . . . .
About one third of all Americans currently hold debt due from credit card issuers (the amount owed varies depending on one’s credit score), mortgage loans ($1 trillion widely considered too large by many economists), or both (the Federal Reserve Bank estimates $2 trillion). With debt at such high levels, however, many Americans are falling behind on their monthly payments (even
What is debt?
Debt is not a word that many people are familiar with. It is often viewed as a form of bankruptcy or simply bad debt. But what exactly is debt?
Debt can be seen as a type of loan, which originates from a credit rating system (like the one we use to rate our creditworthiness). The difference between these two is that loans come with an interest rate, while debt is an obligation to pay back the loan after it has been paid back in full. Debt may seem like it has no value, but it does have value — much more than you might think.
The benefits of debt
Debt is a good thing; it can be used to pay for things you would otherwise have to pay for, and it can even be used as an investment.
But generally speaking, you should avoid debt like the plague. Companies that have gotten into trouble due to their inability to repay debt will almost always go bankrupt, and if they do manage to stay alive, they’ll probably not last very long due to the sheer amount of debt they took on (which is why Macaulay Culkin’s original Juicer franchise was failed by the time he was 25).
But what if you are still young and just starting out? If you are trying to launch a product or service, then you should think of paying off debt as part of the cost of doing business. If you’re just starting out, then this could all be a bit frightening though — what if your debt isn’t repaid? You’ll need to think about how much money you can afford for a little while before launching your product.
How to use debt to your advantage
Properly use debt to your advantage. There are people who have no money, and others who have a lot of money.
While the latter group may not necessarily be able to spend more than they earn, there are other ways to use debt to your advantage.
Here are some examples:
•> The first way is by using debt as a form of payment for things you want or need but don’t want or need at the moment (car loans, student loans, etc.). By using them in this way, you can get what you want without needing to pay for it now.
•> Another way is by leveraging your debt — that is, getting something you can’t use right now with the hope that it will be useful in the future. This can be anything from a new car loan to doubling your savings by selling off a previously used credit card (ideally). This will result in immediate savings when you feel like paying off the debt more quickly — but if it happens too often, it could result in higher interest rates and less money available for longer-term goals.
•> Another way is by paying cash if you can do so comfortably – which means selling yourself short (i.e., selling something you currently own in order to buy a new one). If this puts extra pressure on your lifestyle and finances, then it’s probably a good idea not to push yourself too hard on this front either.
The main thing to remember here is that if you don’t pay down your debt as quickly as possible, there is likely going to come a point where it becomes unprofitable — or else put another way: eventually holders of debt will insist that their loan be repaid sooner rather than later! In these cases (and many others), using borrowed money in this manner may mean having less demand for the item being bought with those borrowed funds than if those funds were just kept in your wallet or savings account! (In fact, even if all these reasons were true, I think we’d still advocate paying off our debts as soon as we can!) This comes at a price though – not only do we have less cash available for us at any given time – but over time our lifestyle expands beyond our means and we end up spending more than we make! So while it may sound like a bad thing when talking about debts being paid off more quickly at some point — think about what else would happen if I suddenly stopped making
The dangers of too much debt
The word “debt” is a very useful one to describe the concept of funds we owe, but what does it really mean?
It’s not as simple as “we owe money.”
The concept of debt has been around for a long time, and there are many different ways that people have used the word in business over the years. The first step is to define what debt actually means. If we say that you owe $50,000 to your bank and you have $10,000 in cash on hand, then we can say that your debt consists of the cash on hand and $50,000 plus interest. But let’s say we bought a piece of land and are now trying to figure out how much land we should buy in order to pay off our debt. The key question is: how much land do we need?
Can you borrow $100,000 dollars? Of course not! You would be better off investing the money in something else. What if we paid back the loan in 5 years? Then it would take us 5 years to pay off our debt (assuming no income), which is why it’s good advice never to go into debt unless absolutely necessary (unless you can make extra money doing so).
Let’s make this slightly more concrete: let’s say you have a mortgage loan for $200k with an interest rate of 7% per year. And let’s also say you make $60k per year from another source. In that case, it takes you 4 years before the payments are paid off; meaning that if you do pay off your loan early (say by buying a Ferrari), then your total payments will be 6 years instead of 4; meaning you have only spent half of your original cost (the interest) on land instead of three times as much as originally spent on land alone (the principal).
That means when you go into debt there is always something else that needs doing first — either paying down other debts or building up capital so you can make more payments later on. Which brings us back to our example: if we don’t pay any further money through tax or savings until our mortgage principal has been paid in full (which will take between 2-5 years depending on exactly how long interest rates are going up), then there is no way for us to get rid of our mortgage without having to spend significantly more than what was originally
How to get out of debt
Debt is a very powerful force. With it, you can get out of a bad situation or, with the right support and help, keep yourself in one. Even if you don’t have experience with debt (and even if you’re not sure what it even means), there are plenty of resources to help you understand what’s going on with your finances and how to avoid it in the future.
Debt can be a positive force if used properly
The funny thing is that it is generally easier to get a loan than it is to pay it back.
I know this because I have seen it thousands of time. I have seen people who have made serious money from their businesses ask for loans, only to be sent to collections as soon as they could afford them.
If you are planning on launching your business, you need to become familiar with this process. It can be intimidating at first, but the payoff can be very large in terms of the revenue you will generate and the amount of cash your business will need to operate. That’s why so many companies are willing to give people loans just so they can do a quick “shutdown” and bring their profiles down a notch before making another campaign for the same product.
It’s important that you understand this process so that you don’t fall into traps like these:
1) You cannot make any money unless you are willing to put up some collateral (or collateralized debt obligations) that proves your ability to pay back the loan in full when repayment becomes due. This way, if you miss payments or default on your loan (which will happen as soon as you start making money), the lender can garnish your wages or seize your assets if necessary, which usually means foreclosure on your house and/or repossession of all or part of your car(s). The few times I have loaned someone money knowing they were going to default or fail me in some other way, I have been surprised how much damage my investments went through in their absence.
2) If you want a second chance at capital gain (usually called “dividend yield”), then make sure that no one else knows about it — including yourself! The short answer here is that most lenders won’t let anyone know about any potential profit until after the loan has been paid off. But there are several ways around this problem: 1) Use escrow accounts (also called “guaranteed investment contracts”). These are accounts where everyone pays a certain amount into an account once a certain condition is met — for example, when a company receives $100 million dollars in funding from investors and pays $10 million dollars back within 30 days with interest rates lower than 10 percent and no strings attached after which they stop paying interest until they get paid off (which usually takes 10-20 years). 2) Use escrow accounts without conditions