Friday - Aug 12, 2022

Why Being in Debt is a good idea

worry on debt

Almost everyone living in  developed countries has some degree of debt. People go into debt to pay for items such as education, homes or  business start up – and then, there are some people who use debt for everyday living expenses like food and clothing. Debt is the money a party borrows from another, usually a bank or a store,  to pay for goods they don't have the ready cash  at present. Debt has become so common, that there are  some who becoming debt free is their main goal in life.

It can be said that almost everyone living in developed countries is living with some degree of debt.

Defining good debt and bad debt

According to Forbes magazine, there is some debt that is necessary because it is used to purchase the products, services and goods that are greatly needed for the improvement of your productivity. Such debt is ususally  sustainable as it can provide future profit, making it easier  to repay.

One of the most common examples of a good debt is the money  borrowed to pay for your education which will substaintablely increase earnings over a lifetime.  Another example of a good debt is the money you borrow for a business start up that will bring you future income.  You can also use debt for real estate which increases in value over the years.  You can live in the house you bought and sell it later collecting the capital gain. Your property can be leased,  which will return a monthly income, or develop your property to raise it's value and on sell. You can also use debt for investing in stocks, bonds, futures, commodities, and precious metals.

Even though all of these options may bring you future income, all of them involve a certain amount of risk. You can learn the knowledge and skills needed for each of these investments to lower the risk and earn a sizable income.

On the other hand, there is some debt which is unnecessary and often uns. You accumulate bad debt by buying unnecessary items with money you don’t have. It is also unstable because these debts involve interests, which takes a sizable amount from your income.

Examples of bad debt are clothes you don’t wear, unnecessary kitchen ware, very expensive cars, etc. These are things you’ve probably seen in the advertisements that compelled you to buy. As a matter of fact, advertisements are defined as a form of promotion that persuades you to buy the things you don’t need with the money you don’t have.

Credit cards should not get in the hands of people who have no discipline. There are credit cards that charge up to 30% interest. These interest rates can double the price of the merchandise or goods that you bought in just 2.5 years.

Bad debt takes a big amount of your income, while good debt gives you the potential for future income.

Debt Financing

You can consider debt financing if you plan to start or expand your business. If you have decided to use debt financing, know the tax implications including the potential tax deductions and non-tax advantages.

Debt financing comes from bank loans, credit cards or revolving lines of credit. Unlike equity financing, the best advantage of debt financing is you have complete control over your business. This means you do not have to talk to the investors every time you make a decision.

Debt financing allows you to manage your cash-flow properly repayment terms are consistent and predictable. For example, if you have to pay $1000 a month for the money you borrowed from a bank to finance your business, you pay the same amount even if your business earns a significantly larger profit. 

Debt financing also has a diminishing interest rate because it is tax deductible. This can happen as long as there is a formal and legal agreement between the debtor and the creditor.

Tax benefits

In corporate finance, the tax benefit you get from debt is based on the fact that it is cheaper for investors and firms to finance using debt, rather than equity. Firms are getting taxed based on their profits, while Individuals are taxed based on their personal income. If a business earns $100 income, and it owes $100 to the investor that lend the money, the investor will pay the taxes, since the business earned $0 after paying the lender.

Learn Personal Finance

If you are indebted, you end up becoming more mature with your personal finances. And that is perhaps one of the most important benefit you get from having debts. You attitude towards money will change if you are indebted. You won’t be so careless with your money anymore and you will learn how to properly budget your finance. This way, you can pay off your debt.

However, it is still important to stay away from debt as much as possible. Just as Warren Buffet said, if you are smart, you won’t go into debt, and if you are stupid, you do not have any business with it.