Last month, we talked about budgeting. This month, I want to cover a more controversial topic: how to use debt. We are going to cover three main areas. What is Debt, Is Debt Evil, and How to Use Debt Wisely.
Debt, in general, is an obligation to pay an individual or company back a set amount of money at a future date. Dictionary.com defines debt as owed or that one is bound to pay to or perform for another. Another way of putting it is you’re giving away your future productivity to someone or a company for a present benefit.
To me, as a CPA, debt is a tool. There are different types of debt, each with advantages and disadvantages. Each comes with risks. The two broadest forms of debt are unsecured debt and secured debt. Unsecured debt is a debt in which you are not required to provide anything of value. Examples of unsecured debt are credit cards and student loans. Secured debt is debt that you must contractually guarantee with something of value. Examples of secured debt are mortgages and auto loans. The most significant difference between the two is if you don’t pay your unsecured debt the holder of the debt has to take you to court for them to get money from you but if you don’t pay your secured debt the debt holder will take the item you secured it with. Like for a car loan, they will come and repossess the car.
We live in a society of easy lending. Our culture says that borrowing money isn’t bad, but you are a fool if you overextend and have to go through bankruptcy.
But what is debt for? If we can answer this question, it becomes evident that debt is just a tool that some use as intended and others use foolishly.
What is the purpose of debt? Debt has several good purposes.
If you keep the above in mind, debt becomes a tool to help provide financial stability and growth.
Let’s talk about each of the above purposes of debt a bit more in-depth, which should give you an idea of how to use it wisely.
A lot of people are going to disagree with this, and that is okay. If you don’t have enough cash saved, you don’t have any options, and this one is probably your best choice since the likelihood of getting reemployed somewhere is relatively high. Now, you would need to reassess your situation monthly and allow yourself to be accountable to other trusted individuals in your life.
The examples above show some wise ways to use debt. But remember, debt isn’t a one-size-fits-all tool. There are risks, and before you decide to use debt, you need to weigh those risks against the potential rewards. In the above examples, your income over 12 months is more or at least equal to your expense. If you are in a situation where your expenses are constantly higher than your income, you will need to look long and hard at your costs to see what can be done. But even more importantly, whether in a complex financial situation or not, you need to be accountable to someone.
Debt is a tool. Our culture has done us the disservice of either making us fear debt or making us assume debt is simple and easy to use. Debt, as with any tool needs to be used correctly. To do that, you need to know what it should be used for. But above everything else you need to allow trusted individuals around you to give you advice and keep you accountable to using it well. I will leave you with this. Debt isn’t something to fear or use flippantly, but when used correctly can be very helpful.
1 Comment
I needed to thank you for this good read!!
I definitely enjoyed every little bit of it. I’ve got you bookmarked to check
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