Key Takeaways
- Debt is a just a tool, and tools are meant to be more beneficial than burdensome to its users
- Debt can be an excellent tool for building wealth and value if it’s used for the right purposes
Monetary debt is money borrowed from someone (e.g., a bank) with certain conditions and needs to be repaid. There are many different types of debt, including personal, corporate, secured, unsecured, and revolving. We won’t go through the different kinds of debt here. Instead, we want to talk about how we should think of debt more broadly.
What is debt (simplified)?
Debt is a tool. It is a tool to obtain what you want sooner. Often, debt can help you make larger purchases when you don’t have the cash at hand. For example, some people use debt to purchase homes (i.e., mortgages). Others use debt to buy material goods.
To use the debt tool, the borrower incurs certain costs. The borrower needs to pay interest expenses to compensate the lender for lending. The borrower will also need to repay the borrowed money at a predetermined date.
How to think of debt?
A tool that generates more value than its costs is a great tool. Likewise, a tool that destroys value must be avoided because it does not cover its costs.
This concept applies to debt as well.
Debt could be a great tool that helps you build wealth and value. It could also be a self-destructive tool. The purpose behind using the debt is a crucial factor in whether the debt is “good” or “bad.”
If the purpose is to make an investment that you expect to more than cover its costs, then debt is a great tool. If the purpose is to purchase consumer goods that will definitely decline in value and only be used a few times, then debt is not the tool.
To decide whether using debt is the proper method, you need to understand the expected outcome. As an example, if you are thinking about taking out a mortgage to purchase a home, you’d need to believe that the home’s value will increase above and beyond the costs to maintain the house and pay the mortgage.
Be thoughtful with debt
Ultimately, the question is: is using debt more beneficial or costly for this purpose?
This seemingly simple question requires you to be thoughtful about the implications of the purpose.
Disclaimer: The contents of this website are opinions and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.