Debt - is it bad?

Jun 26, 2011 12:20:00 PM / by Vu Long Tran

Debt - what is it?
The word, 'debt' carries carries with it a negative connotation, particularly after the GFC where debt is one of the main factors in it. From Dictionary.com, it stands for: "something that is owed or that one is bound to pay to or perform for another".

Debt uses and is it bad?

Yes and no. This is because if debt is used correctly it can actually be a good thing, just as with credit cards (see credit vs debit cards) where you would 'loan' money from the bank to make your purchases of goods and/or services. And no, if you use it incorrectly and spent over your means (or if you venture doesn't go well or as well as expected...)

There are many reasons for taking out this loan, and this could include:

  • Convenience - easier to borrow then to find money elsewhere
  • Improve cashflow - you may prefer to borrow money so that you can use your currect liquid assets (e.g. cash, term deposits, etc.) for something else.
  • The need for money to start a business venture - a person may take out a loan to start a business that they may not have had finances to start themselves.
  • No money to start with - Cashflow might be tight and there may be no money at the moment to start a venture. For example, you may be awaiting payment from salaries, sales, etc.

Debt as the facititator/ enabler:

So these are some of the reasons someone may apply for a loan (and now have a debt), but generally you'd want to do so if you want to engage in activities that you may or may not have been able to undertake otherwise. So debt itself is not bad, as it can often act as an enabler, however, one has to realise that debt is essentially 'borrowing money from the future to pay for today'*. So sometimes borrowing money and investing and/or using it in a certain way may result outcomes which may be positive or negative, however, one has to remember that the debt borrowed will eventually need to be paid back - with interest. So it is hoped that whatever the debt (loan) is taken up for, that it results in the tangible and intangible benefits that it is intended to bring about.

For example, an individual may require a loan to purchase a car, as a car is needed as the individual needs the car for work. In time, the individual pays off the loan (and its interest) with their earnings, but as they were able to get this loan they were able to buy the car for work. Without the car they weren't able to they wouldn't be able to work. Thus, the loan (debt) has acted as an enabled/ facilitator for this situation allowing the individual to purchase the car for work, otherwise the individual may not have been able to work.

As you can see wise usage can enable and facilitate initiatives that may not have been initiated if the financial outlay was not there. I'm sure there are other situations where money can see seen to be available elsewhere but maybe it is tied up in assets, shares or other asset classes, or not there at all. So being able to assess and determine if taking up debt is acceptable and appropriate to one's situation is important. This includes looking at the possible risks that may arise and managing these, and as situations can vary and be difficult, seeking professional or outside help may not be a bad option as well.

Essentially taking up debt is not neccessarily as bad as it may seem, if used wisely it can lead to positive outcomes. It's important to remember that eventually debts (loans) need to be paid off, and with most things in life there are always risks, so knowing what they are and managing them is always important. I hope this offers you a different insight into debt, but always remember to consider your situation with care and be sure to ask for help or confirmation to ensure that you understand what you are doing as well as any consequences it may have.

*'Borrowing money from the future to pay for today'

I often call it this as you are in essence borrowing the $1000 you may have in the future and using the $1000 today for your venture, with the added interest on it of course. Sometimes this borrowing pays off, other times it doesn't and that's something important to remember.

Vu Long Tran

Written by Vu Long Tran

Solutions Engineer APAC @pymetrics . ex-@Forrester consultant. Tweeting on #cloud, #cybersecurity, #equality and #tech tinkering!

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