Good Debt - Does That Really Exist?
May 29, 2019
Our lives revolve around money and we don’t always make the right decisions about how to handle our money.
There was a time many years ago that I did not handle my money correctly and I went through bankruptcy. All my money was going to child support and religious school tuition (a part of the legalized divorce agreement), so to survive I took out loans. In the end I couldn’t pay them off and I couldn’t get more loans, so I went through bankruptcy.
There was no way I would allow that to happen again. I analyzed my situation and where I went wrong, so I wouldn’t make the same mistake twice. I want to share my knowledge of debt with you, so that you won’t make the same mistakes I did.
What makes debt bad?
- Affordability. If you can’t afford to pay off your debt.
- It shortens the decision cycle. It allows you to make the decision to purchase something much faster, not giving you the proper amount of time you normally would have taken to think the decision through.
- The psychology behind it. Debt allows you to feel like you have more money, so you’ll be quicker to spend more.
What makes debt good?
- It shortcuts the process. It gives you opportunities you wouldn’t have had in a certain timeframe. It takes something you can afford and allows you to accomplish that in a shorter amount of time.
- You can leverage your cash differently. You don’t have to tie up your money with other commitments while waiting to earn more money.
Keep in mind that there are other solutions beside debt, like:
- Getting an investor. This way you’re not borrowing money, you’re just giving someone some of your earnings.
- Hustling. Just doing the work and saving up the money for what you need.
Why is debt so important to talk about?
- Debt is a problem. By borrowing money and maxing out your credit cards, you’re creating a situation where your firm has to produce a lot more money in order to cover all your debt obligations.
- Debt is a solution. There are things you need for your firm to grow, but you just don’t have the money for it. Debt allows you to pay for these things which will ultimately bring in more money and pay off that debt.
- Hiring people
- Investing in software and other tools to make your firm efficient
When using debt as a solution, make sure you’re doing it the right way.
You can ask yourself the following questions to see where you stand:
- Is borrowing money just pushing off the inevitable?
If there is an underlying issue and you just use debt as a bandaid, you’re pushing off the inevitable.
- Will the benefit exceed the cost?
You have to make sure that you’re profit from borrowing this money will be more than the cost of it (interest).
Good practice tips for borrowing money:
- Build credit when you don’t need it.
This way you safely build your credit line, so that when you do need to borrow money you’ll already have the credit line and lower interest rate.
- Never borrow money without a concrete plan that shows a return on investment.
You have to sit down and do the math and have a plan for any possible outcome. Make sure you set metric goals for yourself, so you can measure how you’re doing along the way.
- Use your gut as a security indicator.
If your gut is telling you it’s too risky to borrow money from a certain place, at a certain time, or to borrow at all, then listen to it. Your gut knows what you can tolerate.
Be in Control of Your Money, Not The Other Way Around
EntreLeadership by Dave Ramsey