What is Debt?
I feel like I’m always writing about words that should be simple and straight forward based on their definition but every time I start writing, it always goes deeper than what Webster has to say. Debt for example, the definition of debt is, “Something owed”. How many people would you say think the definition of debt is just, “bad”? Probably a lot and while Dave Ramsey can’t even contain how excited he is to hear that, Micheal Jackson is rolling over in his grave. If we are going to use a single word to define debt, the word we should use is “misunderstood”. There are different kinds of debt as well as different purposes for using it. Debt can be bad, it can be like a dreadful financial prison. Water can also be bad though, hurricanes are terrible. Drinking water after a long run on the other hand, top 7 favorite things. Proper utilization of debt, probably top 5. So, personal debt, business debt and government debt. Who owes what to who(m) and how do we go about paying it all off?
First, we have “personal debt”. Most of us have been in “personal debt” at one point or another over the course of our lives, you know? What did that feel like? I know it was pretty damn uncomfortable for me when rent was due and I knew I was going to have to borrow money. That was the WORST! That very feeling is what makes debt “bad”, not the act of owing someone money. If you don’t owe someone money, that means no one gave you money to borrow and if you needed money for rent because your check was short, what happens? You are evicted. So, going into personal debt is emotionally bad but if good means staying in your house or keeping your car then how could debt be bad? Now, the part I haven’t gotten into yet is; to whom are you in debt? The answer to that question is what determines whether debt will be good or bad. On one side of the spectrum we have The Banks. In my latest article, “Growing Money On Trees”, I wrote that Banks can charge up to 36% APR for a personal loan on the high end. It isn’t always 36% though, sometimes it’s less. There is a whole algorithm that judges your ability to make payments on time that they masquerade around as if it’s an accomplishment of character. Just don’t ever mess up, or else! If you don’t have credit, its difficult to get credit and if you do have credit but for some reason you miss a payment, your phone blows up like a Kardashian from bloodhounds wanting money. Plus interest. Plus fees now, at this point. It’s a joke. On the other end of the spectrum, if you have proven to The Banks that you are “good steward” of finances, they will give you 0% interest! Think about what 0% interest would be like on your car or your mortgage. That would greatly reduce your monthly expense, probably even a hundred bucks or so. What if you took it a step further than that though? What if you could earn interest every time you borrowed money instead of pay it?
You could become a bank! That is already how it works for them. If you remember back to the latest article, we talked about how Banks create money. We talked about how they take 9 out of your 10 real dollars, loan them out to people that need dollars and replace your real dollars with “bank credit”. The Banks earn interest when people pay off their loans plus interest (up to 36%). So, how is it that they can borrow YOUR MONEY and then earn interest while, if you borrow “THEIR MONEY” you have to pay interest? It’s not even their money. That actually brings me to business debt. I would define business debt as, using other people’s money for opportunity to create new money. An example would be like if Tesla borrowed one billion dollars to generate some sort of technology that will generate 100 billion dollars in total revenue. Typically, this happens over a time period and let’s just say that is 10 years. First things first, Tesla has to be sure to pay back each of those billion dollars plus interest. Second, they focus on doing their thing which is making cool shit. Finally, the cool shit they came up with starts making money and its about 100 times what they are having to pay off each month. In that case for Tesla, was that good debt or bad debt? Probably good debt if it helped them make an extra $99 billion over 10 years, wouldn’t you say? Also, maybe more importantly, if the cool shit isn’t cool and people start dying, from a numbers only stand point, Tesla would have 10 years to get it sorted out as opposed to taking the billion dollar kick in the nuts all at once. So, from two different angles, debt seems to be a smart idea. Business debt offers A. Protection, and number two, opportunity or capital. What’s fun is business debt isn’t just for businesses. I don’t really even limit personal debt to just people either if I’m being honest. Look at RadioShack for example, they went bankrupt twice and it wasn’t because they were coming up with 100 billion dollar technology. It was because they got smoked by competition, borrowed money to keep the lights on, thinking Amazon would die down and things would pick back up, debt would be paid and RadioShack reign supreme. The same thing happens with people. For what ever reason, our expenses exceed our income and that forces us to borrow money so we can fill in the gap. We do this until we do or don’t weather what ever storm we are facing. If we don’t weather the storm or we can’t, then we drown into the abyss of bankruptcy just like our friends at RadioShack.
Government debt is a whole other beast and like most government deals, its tricky, ineffective, and unsustainable, no offense. Government debt is like a weird combination of both personal and business debt. On one hand we have the money that we borrow from other countries like China. China will loan us money in hopes that our economy will be boosted and as a result, it makes trade more effective for them. The problem is America doesn’t create enough money or anything really worth enough value in trade using other people’s money (in this case China) to offset what they owe plus interest. So they take from our future prosperity by selling bonds to The Banks which offsets the deficit created by The Federal Reserve, which is a private corporation with shareholders. *cough Banks* Man, I need a cork board and some red string. I really feel like I’m a detective solving a crime connecting all these pieces with some of this. Anywho, politicians as well as self proclaimed “experts” generally say our national debt is somewhere around $21.8 Trillion, according to usdebt.org which no doubt, is a good chunk of cash but the real debt for our country is more like $138 Trillion when you factor in what is called “unfunded liabilities” AKA, IOUs. That exact trickery and confusion is what allows for our country to spend, spend, spend.
To recap, with personal debt, it cost value (usually money) to borrow money. We have business debt where you use other people’s money to create new money. Which means earn interest when you borrow money. Then lastly, we have the government and they don’t care about debt because at they end of the day, they think they can just send over whoever to go beat ass. In fact, I’d be willing to bet that if our military wasn’t as strong as they are, our dollars would be called Yen and we wouldn’t be called Americans right now. So, Thank God for our troops. Our government really owes a lot of money, do you know what year it was just ONE trillion seconds ago? 1 trillion seconds equals 31,688 years we owe that times 138. That is $1 per second for 4,372,944 years. All in all, as far as getting out of government debt goes, they can either spend less or tax more. For getting out of personal debt, get financially optimized. Work alongside a finance partner to help get you on the right side of debt. Debt can be a beautiful thing when you owe the right people money. Land on the wrong side and you could get fucked. Cause the only ones who can bail you out don’t use English as their primary language.