Debt is a funny thing, we all know it’s bad yet so many use it to purchase that new television, car or that house which is well beyond their means. Saving money and taking out debt are the equivalent to the two poles (North and South pole), complete opposites. Banks are making it easier every day to take out loans in order to help us buy the things that retailers tell us we need. Debt, they tell, us is a tool to help us get what we want.
They aren’t wrong, debt can be incredibly helpful, but only as long as it’s used in the correct way e.g. financial ventures, money returns and business ventures etc. It’s just a shame that the vast majority of the population don’t choose to use debt to their advantage. However, by understanding the following truths about debt, you can begin to navigate the financial waters of today's economy with more finesse.
Use Debt as a tool when you minimise its impact
The most effective way to use debt to your advantage is through the form of leverage. A very successful method to build wealth that requires debt is to have something of value that can be leveraged in order to generate returns which outweigh that initial debt.
Houses are a prime example of this because they are considered to be more of a good investment compared to many other types. There is a difference between buying a house beyond your means to raise your family and build memories within, because if your financial situation changes you are hinging a big risk on that lifestyle. Whereas mortgaging an empty house to make available to rent provides better value for money and turns the house into an asset, since the tenants are servicing your debt and interest for you.
The overall concept mentioned above can be used on any scale of debt, but it's focusing on using it as a tool that makes the difference. The ultimate objective if you want to use debt as a beneficial tool is to spend money on a system that will give you a return and service its own interest payments. If you have to use your own income to pay for the debt then you have just handcuffed yourself to your financier.
Debt Makes Lenders Richer
Whether you love or hate banks it doesn’t matter, they are not charities hence the interest you get charged on any money you borrow from them. Without interest there is no benefit to the bank lending money and it happens to be one of the most defining characteristics of a common investment, aka bonds.
Hundreds of years ago wealthy individuals realised that they could earn money from the interest of loans that they would give to people who couldn’t afford what they wanted. Hence we witnessed the birth of banks. The feature to actually use a bank to store your money actually came much later within the banking system.
The sooner you realise your bank manager or your lender isn’t your friend the better.
Those who Can’t Live Without Debt
A casual look at the amount of lending across the Australian nation reveals some disturbing trends of how more and more people's lives are becoming intertwined with debt. Financing a new car, mortgaging a new house, selling a car just because it’s no longer cool, financing a new car, selling a smaller home because you feel you need a larger one....I could go on.
All of these individuals aren’t the ones who retire at 30 or who abandon their 9 to 5 job because they are in caught in system where they can’t. They effectively become financial cattle within an economy-generating herd controlled by debt and forced to keep working to service that debt that they borrow to ‘live’ their lives.
Hard work and excellent money management skills are the key to financial freedom and the key ingredients to financially rewarding pursuits e.g. starting a business, owning rental properties or becoming an investor etc.