When I went to Spain sometimes back, I was amused by a local quote concerning debt. I noted it down and vowed to share it with my readers someday, “debts are like children: the smaller they are the more noise they make,” So the quote goes.
But many people, having been raised to have a rigid worldview concerning debt, struggle to use the avenue to build a fortune. When Obama got into office, he said that he found the national debt, doubled, wrapped in a big bow waiting for him as he stepped into the Oval Office. That’s the reality of debt. Even super powers have debt. But how can you take advantage of debt and use it to build an empire?
The reality that a majority of us cannot buy a house, buy a car, or go back to school to advance our education using cash is real. Getting a loan to finance our dreams is not bad at all but the secret to being successful is being smart with your money. It actually does take money to make more money.
So what is the difference between good debt and bad debt?
Good debt in a layman’s term means debt that creates value. For example, if you borrow money to buy land, go to school or start a business then that is good debt.
Debt is good, as long as it brings high return on investment. In my history of investing, investing in stocks, bonds, land and other high return investments is a healthy habit. However, it is important to realize that sometimes even the best ideas do not work out.
It is all a risk. You could go back to school and still be jobless especially during economic downtimes. Those who have just completed their high school education, usually have high hopes that once they go for higher learning they will earn more. But sometimes they get out of school only to find no employment or low entry jobs that they may think are ‘beneath’ them. The secret is very simple, just take risks that are well calculated and wait for a good return on your investment.
It is great and commendable if you get into debt in order to start your business. The country needs more entrepreneurs and banks needs to soften their lending rules for such outliers. But even the best ideas also run the risk of failure. However, that should not dampen your spirits. When I started out, I didn’t know that I would build the business empire I have. But focusing on the next step, with determination and working smart, I achieved my goals. My advice is that you research well on the demand for your goods or services.
Bad debt, on the other hand, is borrowing and investing on products or items that depreciate and also are a liability. Buying expensive clothes, being a ‘sponsor,’ buying and over indulging in alcoholic drinks sometimes to impress friends, regularly eating out as well as using credit cards can be classified as bad debt.
I hardly ever eat out but when I go out I make sure that it is of value to me. If for example I am going to meet a business partner or an investor then it is a worthy investment to eat out. Therefore, before you go into debt, make sure you take the time to really ask yourself why you are borrowing the money. Will it add value to you? Is it a proper investment with high returns?
Of late there is a craze… Everyone wants to buy a car. While it is convenient to get a car, it may not be a good idea to get into debt for a car. It’s the kind of investment that will bleed your pockets in terms of maintenance, fuel, etc. Once you are done paying the loan for it, the car’s depreciation will make you realize that and alternative investment would have been better.
Remember that what eventually sinks a ship or crashes a plane (preventable causes) are a series of mistakes done repeatedly over time.
In a world that is rapidly changing, the only people who will rule are those who will take risks. In fact, the biggest risk is not taking any risk at all. In a world that is shifting really fast, the only strategy that is guaranteed to fail is not taking risks. Rise up and try out your idea. Save up for your initial investment. Take a bank loan and dare to venture into the realms of the unknown where risks are numerous but the rewards are many.
Decide if you will continue to report to trade you valuable 8 hours per day or more to build someone else’s ambition or you will risk falling into debt, having a few sleepless nights but be free from the curse of poverty.