Comedian Bob Hope once joked, “A bank is a place that will lend you money if you can prove you don’t need it.
We laugh, but it’s true.
Credit institutions could not stay in business for long if they lent money to people who could not repay it (with interest).
The banks are therefore cautious. They consider the risks before issuing a loan. We should do the same before we take their money and get into debt.
When is debt constructive? When is it destructive? A brief review of three popular approaches to debt can help us tell the difference.
1. Debt instead of discipline. Debt is destructive when used because foresight, planning, and self-discipline were not.
Some people seem to believe that credit cards have a magical ability to build wealth at the time of purchase. Quite the contrary in fact. Once you start the “revolving” credit on your card, every purchase you make increases because of the interest you pay. So those shoes that cost $ 200 actually cost you $ 236 if you use a credit card that charges 18% interest.
People who live like this soon find themselves in a modern day debtor prison. Their cards are at maximum, but they are still paying hundreds every month just to keep their minimum payments.
It is a painful existence.
Here is a second approach to borrowing money:
2. Debt instead of delay. Years ago I met a man who had listened to a Christian finance guru who argued that any debt was a sin against God.
As a result, the man refused to take out a mortgage to buy a house. He would only buy a house if he could pay cash. Therefore, he moved his family to a run down rental property in a not so great neighborhood. It was the only place he could find a house large enough to house his family.
What this man did not understand is that what he was saving in interest he was losing over time. You can only raise your family once. The constructive use of the debt would have enabled him to raise his family in a better framework.
Using debt to buy a home can be a very wise thing. Especially during times like these, when lenders are “selling the money” at an all time high.
Here is a third popular approach to debt:
3. Debt instead of diversion. I have had clients with enough assets to pay off their mortgages. It would have freed them from their debts. Sounds like a no-brainer, right?
But they also had the opportunity to buy from the company where they worked. They understood the business and saw its bright future. There was a good chance that the money invested in the business would double over the next five years.
Some in this situation would decide not to go into debt and get it over with. It is a good choice for them.
My clients have chosen to keep their mortgage payments and invest their available cash in their business. Nothing is risk-free, but they did not want to “divert” dollars from their highest growth potential.
Keeping some debt so they could invest instead – get into debt rather than embezzle – was their best bet.
Debt is simply a magnifying tool. It worsens bad financial decisions and improves good financial decisions.
I have a chapter on debt in my book “How to Put Your Money Worries in Your Rear View Mirror – The Roadmap to Financial Freedom”. I’ll be happy to get you a free copy if you email [email protected] and request one.
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