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What to know before Buy Debt

We all know about debt. If you don’t have too much as an individual you can increase the quality of your life, but with more than you can handle it can make your life a nightmare.

There are two kinds of debt. Usually it is personal and used to buy a depreciating item such as a car or entertainment. 

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Today a car has become a necessity, but it doesn’t mean you have to buy a new one every 2 years or one that is beyond your means. It should be thought of as transportation.

The second kind of debt creates an asset that produces income that will more than pay off the debt. For a business this can be a truck, a new machine, even a new building for office or production. 

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A person may borrow money to continue education so there can be career advancement. Money borrowed for production is very healthy.

A mortgage is a necessity and can be classified as creative debt. You have to live some place so you have a choice of rent or mortgage payments. Most everyone prefers the latter as it creates an asset as well as shelter.

Before taking on any type of debt it is wise to determine the risk. Debt creates risk. For personal noncreative debt you must consider your income that will allow repayment of the obligation especially if it is one that has no value to anyone else such as a vacation or flying lessons. 

Do not borrow money to go to the racetrack or gamble in the stock market. The first consideration when borrowing is what will happen if I can’t make the payments? Will what I have purchased have any remaining value that can be sold to reduce the balance remaining?

If the balance cannot be repaid you want to do everything possible to avoid bankruptcy as that can haunt you for the rest of your life. Debt consolidation is sometimes a solution. 

For a business there is a preliminary bankruptcy that allows the court to appoint a special manager to watch over even run the business until it is back on its feet or declared defunct.

The world as we know it swims in a pool of debenture

Business today could not survive without some form of borrowing nor could the consumer have all the conveniences that make living a pleasure — washing machines, TVs, air conditioning, garage door openers, can openers, computers just to mention a few most of which are obtained with the help of a credit card.

Keep in mind the 2 kinds of debt — the kind that creates an income producing asset and the kind that does not. 

You must decide how much of each you can afford.

There is nothing wrong with debt as long as it is used intelligently.

 

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