Debt: Constructive or Destructive?
Debt: Constructive or Destructive?
Has debt got you down? Are you struggling to make all those payments that come due each month? Do you sometimes get the feeling that no matter what you do, you just can’t seem to get ahead? Do you hope for a raise so you can use the extra money to work your way out of debt? Or do you feel that the only way to improve your life is to change jobs, move, inherit money, hit the lottery, or find a get-rich scheme that really works?
If you responded positively to any of these questions, then you are experiencing the effects of destructive debt. For many people, the mounting pressure of debt creates problems with spouses, friends, and coworkers, or simply drives them crazy.
Destructive debt is a terrible thing. It is debt to acquire items that are consumed prior to being paid for or that go down in value after their acquisition, without generating income to service the debt. Examples are debts to pay for food, fuel, clothes, entertainment, gifts, recreation, personal care items, telephone, electricity, water, cable television, and any similar items that people charge to credit cards.
And ya, Don’t misunderstand things here: There’s nothing wrong with using credit cards to pay for these items if you pay the bill in full when it is due. The amount charged does not become destructive debt until it carries over to the next month.
Debts to acquire cars, boats, campers, motorcycles, furniture, or other large ticket items that are not used to generate income are additional examples of destructive debt. In today’s world, more people ask themselves, “Can I make the payments?” than ask, “Can I afford to buy?” Why? Why do so many people succumb to impulsive buying urges? Could it be because we are continuously bombarded with advertising messages that make it seem like that “cool” or “in” thing to do?
But as we begin to develop the Wealthy man mindset, we will find that overcoming these impulses becomes increasingly easier and you’ll make more informed buying decisions. Building wealth is more about managing money than about making money, but that’s not what our education system teaches us.
Considering that most high school graduates leave school without knowing how to balance a checkbook, prepare a family budget, or fill out a financial statement, is it any wonder so many people get in financial trouble? It should also come as no surprise that many college freshmen become addicted to destructive credit card debt before they complete their first year of higher learning, and the sad part is, they usually don’t realize they’re addicted until they are so far in debt, it will take years and years of sacrifice to get out of the hole.
But not all debts are bad. You’ve heard it said that it takes money to make money. To most people, this means working harder and earning more, but to the wealthy person, it means getting more money to work for you, and it doesn’t have to be your money. That’s when constructive debt enters the picture. If you borrow money for 6 percent interest annually and invest it in assets that would pay you 10 percent or more annually, how much would you want to borrow? Would you agree that this kind of debt could eventually make you wealthy?
The advent of credit cards and the ease of credit for consumer purchases come at a price. The payments consumers were making on this easy credit were coming from the cash they were earning on their jobs, trading labor for money. What made this debt so destructive was the fact that a sizeable portion of the payments was interest, which bought them nothing. This means that part of the money they earned was merely being transferred to people with money to loan, and as a result, the rich got richer and the poor got poorer. Every working person who is making payments on consumer debt from the money they get on their job is transferring wealth to the wealthy, not improving their own standard of living with the new things they are buying. Your true standard of living is determined by what you can purchase with the money you earn working plus the income produced by your investments. Financial independence does not occur until your investment income will fully support your lifestyle. Nothing more, nothing less.
So, how can any debt be used constructively? The answer is simple! Don’t borrow money unless you can put it to work and have it earn more than it costs you to borrow it. While that answer may be simple, the execution is not. You don’t just run out and borrow money and then look for a place to invest in. You have to be patient, creative, determined, and committed. You need the patience to sort through all the opportunities that present themselves in the marketplace if you expect to find the ones that have real potential.
You have to use your creativity to develop opportunities with potential into investment-quality possibilities. Then you must have the determination in order to convert possibilities into probable investment opportunities and make a commitment to turn the probable investment opportunities into performing investments. This is the process, the journey toward building wealth and building the Wealthy man mindset.
That’s all for now, my friends. See you all in my next articles.
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