Debt is Good
That is, of course, if it's the Right Kind
If Cash is King then Debt is the King’s Loyal Knight. How do you like that analogy? People tend to shy away from Debt because it's normally associated with a negative connotation. Don’t go into Debt, avoid it all cost. While that can certainly be true for those who can’t manage it properly, believe it or not, sometimes Debt can be Good.
Think about your biggest asset for a moment. If you’re like most people, odds are, you’re thinking of the home you own right now. Think about how you acquired that home. It probably came in the form of a Mortgage. Which is essentially a whole lot of debt you take on in order to purchase something that you otherwise couldn’t afford. As a result, you can call yourself a home-owner even though you won’t truly own the home outright for another 15-30 years. And if you do it right, the appreciated value of the home will far outweigh the interest you accumulate over that span of time. Especially if you treat it like an investment and cash out every 5-10 years and rolling your profits into the next home.
You see, if this teaches us anything it should be that there is a reason why so many people go this route in the path to financial freedom. Because it works. So why are we so scared to take on debt otherwise?
THE SIMPLE ANSWER...
The answer is simple. Too many people take on debt in the absolute worst way. It comes in the form of running of credit cards with high interest rates with no real plan on how to pay them off. Their correlation with debt doesn’t come in the form of a good investment but instead of a tool that immediately puts them in a financial hardship, essentially scaring them off from taking on good debt that can actually help to build wealth.
We saw a lot of this during the roll out of the stimulus programs for businesses that consisted of a combination of loans, grants, and forgiveness programs. I can’t tell you how many people I talked to that were afraid to take on some of these loans because they were afraid of taking money without a plan to repay it just because they didn’t need it in the moment. However, when interest rates of 1%-3% are being tossed around it would be foolish not to take that on and find a way to turn that into additional money in your pocket. It’s essentially the same as taking on a mortgage and you wouldn’t shy away from that approach when it comes to financing a home or let it stop you from taking on a large amount of debt to purchase a place to live So why let it stop you from taking on a similar financial situation that will allow you to grow or maintain a business?
THE SECRET
A little secret. Many businesses of all sizes operate using some form of a line of credit. Usually these lines come with a normal interest rate somewhere around 5%. Now let's say because of the COVID-19 issues you were able to secure a loan at 2%. Even if you used that loan to pay off your other debt, you would be saving 3% on your money just by moving funds around. That’s a better return than you’ll get on most CD rates these days from your local bank. On top of that, any interest you accrue is a write off on your taxes.
To me, being scared of the right kind of Debt is just another tool that society uses to keep the average person down and stops them from ever growing financially. By introducing people to Debt that puts them in hardship early on in life, we never learn the proper way to take it on and make it work to our advantage.
No risk, no reward. If you’re not ready to wisely take on Debt you will forever find yourself in the Struggle State. Remember, scared money don’t make money...
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