Issue time 9:39 am, by CTreit
Category:Debt Management
To eliminate debt or run up debt? That is the question.
July 22nd, 2010What a silly question, right? The answer is so obvious. Of course, you want to eliminate debt, especially in this day of age when we all seem to have too much debt as it is. But let’s not go crazy here, because surely there are instances when debt is more than okay.
Think about how a corporation operates, or take a look at the balance sheet of a public company. You will find things like current liabilities and long-term liabilities on the balance sheet. These are the debts of companies. They hold debt all the time!
Why does almost every company have debt? A company runs up debt if, for example, it buys a new machine for which it cannot or does not want to pay cash. It finances this machine with a loan. Yes, it runs up debt. At the same time this machine in question helps the company produce stuff for which the company in turn gets paid. The company can then use this money to pay back the loan it took out to buy the machine that allows it to produce things in the first place. In other words, the company has acquired an asset that helps it make money. Nothing wrong with that, is there?
As individuals we should look at our assets and debts the same way. If you buy an asset that helps you make money, it is ok to run up debt – all within reason just like it is the case with a company.
One of the goods that help you make money is education. This is why we can easily argue that financing an education with debt is ok. The higher income that results from your education will allow you to pay back the loan. Adding to your education is making an investment in yourself that is expected to pay for itself with higher incomes at later dates – and the evidence shows that this is normally the way it turns out!
The same goes for founding a company or buying a car. If the car allows you to make money by getting to work or visiting customers, it is a great asset to have, one that is worthy of running up debt for. Again, the additional money you make allows you to pay back the loan. If the car is just for joy-riding, though, or you found a company and do little to make it profitable, you’re not really making investments.
The key to debt is quite simple. If you take on debt, make sure you acquire some asset that makes you enough money to pay back the loan and then some. When you follow that simple rule, debt will serve you well and won’t be a great added burden to your financial life.
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