What’s in a Debt?

It is said that “Debt is the worst poverty”

Not sure if the above statement stands true, may be yes, may be no! Two sides of a coin.

Debt is a very crucial part of Personal Finance. It is important to know how people who understand it perceive it. However, the ones who do not, keep falling in a debt trap…

What is Debt?

At its simplest, debt is defined as money owed by one party to another. But it can get complicated fast. Depending on your circumstances, debt can be a useful financial tool or baggage complicating your life.

Surely, there are various types/concepts in the entire chapter of debt and one can talk about it for not sure how many hours, but the very basic question that I still do not find a firm answer for is, how important a debt really is? Also, how much?

The thing with debt is we can spend more than we could normally do, but what we spend on, makes all the difference.

Should one borrow?

Borrowing has surely helped some of the major corporations and also people to be where they are. Building up on the right leverage requires one to look down internally and then decide on the exposure that needs to be taken.

Having Debt to create more wealth, buying assets and investments surely drives a smarter and a successful long term financial plan.

To look at the grounds, I guess the type of debt we take on, along with its quantity and cost, can mean the difference between a good debt and bad debt. Not only for the corporates, but also personally, debt taken to create another debt can be one of the stupidest things done by anybody in the course of financial planning.

In the current scenario, where spending has increased due to the financial products offered/promoted in the market, if not used wisely, we are just creating a liability for the future years.

However, it appears that the industry always wants you to be under consumer debt - credit cards, huge wedding, 30-year mortgage, car payment and the list goes on.

Look at the graph that below provides the Country-wise Household debt for FY21:

Does borrowing really help in creating wealth?

It can lead to a wise decision if you borrow to invest in growing assets which could be a powerful means to build wealth overtime as it enables you to purchase more investments than would be otherwise possible. The goal is basically to create wealth by spending and borrowing effectively.

If your investments increase in value over time, gearing can generate a higher overall return, after the interest and other costs associated with the debt have been factored in.

If your major borrowings do not yield you returns, guess it’s time to pay them off, as one of the roads to financial freedom is being able to use your own money without worrying about the cost of using it.

These are just some of my views/questions/learnings on the much wider concept of Debt. Do share your views or even personal experiences of debt that have helped you either increase your wealth or learn in life :slight_smile:

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If one can be Debt free nothing like it. Zero debt on the books is a goal worth pursuing.

Debt to fuel growth depends on one’s perspective. Future is uncertain. Leverage in the balance sheet has killed many corporations as much as it has helped some others.

I think one needs to differentiate between good debt and bad debt. Debt taken for leisure and self-fulfilment can become difficult to pay back, whereas debt that has been taken on for business, entrepreneurial or productive purposes can be good for both economy and is also easier to pay back as the objective is to earn net profit on this.

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This might not be a great example but here it goes

There are people who just cannot save or invest. Whatever you do, they just don’t have the saving habit in them which results in people spending most of their earnings

Few experts have advised these people to take a loan and on the same day u get the loan amount invest in a productive asset which u cannot touch, say as an example NPS

Every month the emi hits and takes ur instalment. This is called forced savings. Yes there is a cost involved but this cost is the charge you pay for being indisciplined.

This for those extreme cases only.

This way though there is a cost the person has created capital through debt

Debt is great if you are responsible and use it for productive assets and not for consumption
Wealth can be created by debt

Disc. These are views of few experts which i read long time back might not be applicable to others

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Nice post. Just sharing this very readable book on this topic. Follows through the history of Debt from Nomadic Barter to Collateral Debt Obligations where no one exactly knows who owns what to whom.

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Nice read on having a healthy financial life👇

PS : Not promoting any websites or its content :slight_smile: