Debt isn’t the Monster, everyone has made it out to be!

Since the age of Kings and Queens, debt has always been something that has been looked down upon. It might have made sense during that age but in the 21st century, it would be a crime to make debt the culprit of all things evil. People who call ‘Debt’ bad or unproductive haven’t really realized the true potential of it and my aim with writing this article is to make people understand that there are always two faces to a coin. I hope at the end of reading this article you get my point of view and you’re able to leverage debt the way it is intended to.

But first, let me answer the question, What is debt?

Answer: In technical terms ‘Debt’ refers to any obligation that requires the debtor, to pay money or any other agreed upon value, to another party, called the creditor. 

In simple terms debt is the amount of money you or any party borrows from someone else in order to set up a deferred payment system to pay back that original sum plus an additional amount as interest, which is basically called the cost of taking/availing that debt.     

Now let’s dive straight into this article. 

1. Debt helps in Redistribution of money in the economy. 

One way of seeing debt is as a way to reallocate money to more productive areas of the economy. Suppose one person is currently short of money, and another person has a surplus (excess saving). Debt is a means for the person with excess savings to lend to those in need of money. Without the instrument of debt, there would be more infrequent imbalances of money and it would constrain economic activity. In theory, debt doesn’t lead to a loss of money. For every liability, there is an equivalent asset. For every borrower there is a lender.

2. Debt is mutually beneficial. 

Debt contracts should be prepared to be efficient in ways that both parties become better off as a result. The lender gains interest on his loan. The borrower gains money when he needs it and can use it for a more productive process. 

3. Investment. 

Without the instrument of debt, it would be very difficult for firms and individuals to invest in increasing capacity. The early railways were built by the private sector and it required companies to take on substantial debts (usually in form of shares) to be able to build the railways before the firms started to gain income. Now, if debt wouldn’t have been there, our nation wouldn’t have had the most elaborate and large network of railways in the whole world. 

4. Generates Employment

Yes this may come as a shock to you but yes debt in fact generates employment. When a company borrows money to expand, it is obviously aiming to be more productive in the future, the more it grows, the more manpower it needs and the more people it will be able to hire. That’s how Debt generates employment when you look at the complete and big picture. 

5. Debt leads to accumulation of wealth over time. 

The major thing that you need to understand about debt is that it is all about how to see it beyond a liability and be able to leverage it. And how you will leverage it depends on whether you are able to generate a regular cash flow from it or not. Understand this basic rule. If something makes cash flow into your pocket  then it’s an asset while if something is cash away from your pocket it’s a liability. 

There is something called Good Debt and Bad Debt.

You need to understand the six basic terms of finance if you want to create wealth for yourself in the long term. They are: Income, Expense, Assets, Liabilities and Cash Flow. You see, the problem with most of our working class population is that they take up a 9-5 job, generate income that flows into their income and expenditure statement but then start spending money on things left and right, without even evaluating its effects in the long term. And an even more catastrophic step that they take is that they start accumulating debts over their heads because they run short of surplus. That is where most people go wrong. And since they don’t have that extra money lying around they falter in their payments, ultimately ruining their credit scores. 

Even after all of this they start acquiring things that they think are assets but in reality they aren’t. Buying a car on loan, a house(that you are going to live in) isn’t actually building your wealth because they ultimately end up taking money out of your pocket. A car depreciates in value the minute you drive it off the lot. A house that you bought isn’t an asset because you end up paying taxes, maintenance expenses, electricity taxes et cetera on it. Al, of these with your insurmountable credit card debts are bad debts. 

But on the flip side, when you Buy a car on loan and use that car in your business to earn more than the interest you are paying on it through your monthly EMIs, then that money that you took as debt becomes free debt. Similarly when you buy a property and instead of living in it you convert it into a rental and earn monthly payments in it on the regular then that is putting  money into your pocket. That is really getting free money for over a period of time. And won’t you take free money. Coming to credit cards when you create a debt over yourself buying something on a credit card which is already out of your price range and on top of that depreciates instantly in due time, then my friend  I am sorry to it is you who has screwed yourself not the debt.  Contrary to that, if you use your credit card to maybe fund your business, buy a real asset, something that you resell again with a profit  over a short period of time, then my friends you have learnt to leverage free money in the form of debt. 

So, now you see how the same debt can be a good debt when you use it wisely and probably with logic rather than blindly jumping into it with no planning whatsoever.  It’s people who make debt bad, not the other way round. 

Basic Lesson

If you’re going to be successful at anything, whether you’re an employee or entrepreneur, you’ve got to control the direction of your cash flow. Most people get a job and instantly start to lose money by paying direct taxes to the government(which I am not saying you shouldn’t). But when you are an entrepreneur you get to pay less taxes because of various types of subsidies and schemes offered by the government and the best part about it all is that you get to do it legally. 

Major chunk of the people get this inherent feeling of rush to have ownership over things the minute they get a stable job and then what they do is that they make a series of bad decisions.  They start accumulating depreciating assets like mortgage homes, cars et cetera. 

What they don’t think is that they are actually tying themselves up for years over something that is going to lose it’s value year over year.