Monday, February 1, 2010


Debt has been described to me as a "four-letter" word. Bank debt is two four-letter words. The Bible, as well as other sources of conventional wisdom, warn of the evils of debt, and with good reason. But there is "good" debt. In business, good debt is that debt that allows you to acquire assets whose value is more, or will grow to be more, than the debt required to acquire it. An example of good debt is for a yard service to borrow the money to purchase a riding mower. With only a push mower, the owner cannot grow his business. But with a riding mower, many more yards can be mowed. The difference in capability will more than cover the cost of the riding mower. Bad debt is borrowing to acquire items that will decrease in value or are a liability. The most common form of bad debt is carrying a balance on credit cards, because most items purchased with credit cards do not increase in value and are not used to create or increase the value of other assets.

If you have lots of money, spend it on whatever you like. You earned it, you can waste it. However, if you want to ever get ahead financially, insure that the only debt you take on is used to increase your asset base. What is an asset? It is something that makes you money. What is a liability? It is something that decreases in value. Is a home purchased with debt an asset or a liability? Good question. In most instances, if you have a good down payment and find a good deal, purchasing a home is a good move. It will probably reduce your monthly living expense, while possibly, over the long-term, it will increase in value (although recent history should alert you to be cautious even when purchasing a home.) Is a boat purchased with debt an asset or a liability? Don't even ask. A boat is a hole in the water into which you pour money!

If you are living on bad debt, change your lifestyle immediately. Debt will destroy your finances, your relationships, and your life. Debt can be used as a tool, but like a chainsaw in the hands of child, it can be very dangerous.

1 comment:

  1. A boat is a hole in the water. Funny!

    Good advice. So the upgrades to my basement. Should I take out a loan?