Til DEBT Do Us Part

DOLLAR$ AND $EN$E, May 2010, by Brian Bogaert


'Til DEBT
Do Us Part
debt


In the Red
Just yesterday I saw a bright red cardinal outside my window – a sure sign of Spring – but it also gave me an idea for this article, which is all about debt. Why would a red bird give me that idea? Well in finances, red is the colour referred to when a person or company owes money, otherwise known as being ‘in debt’. You may have heared someone say "in the red". The opposite of that is to be ‘in the black’ which is when you are making lots of profit!

Money Habits Start Young
These concepts can be pretty complex but it got me to thinking... how do people and companies wind up with thousands, millions and even billions of dollars of debt? It all starts with their habits around money they got a lot of from a very young age. I’m hoping that if I open YOUR eyes to some ideas now, it can help you in the future.

What is Debt?
Debt is basically owning someone money. If I borrow $20 from you, I’m in debt and I owe you $20. There are lots of ways someone can borrow and the example I just gave is probably the simplest (borrowing from a friend). There’s a good chance that your family is in debt right now. I don’t mean that as an insult, honest! If your family owns a house (as opposed to renting an apartment), then they likely have a 'mortgage' which means they borrowed money from the bank to purchase that house. You hear people say that they ‘own’ their house but in reality, very few people actually own their homes. By having a mortgage, in actuality they have shared ownership of that house with the bank until they pay off their mortgages completely (and for most people, that bank owns much more of it than they do).

Good Debt?
Now debt isn’t always a bad thing. When I was younger, I didn’t want to ever have ANY debt. I felt as though owning someone money somehow put me in a bad place. As we’ve discussed here, we get many of the ideas about money from our families. When I got older though, I saw that some debt can be better than other debt. For example, when I bought my first vehicle, my Mom loaned me $5000 so I could buy it interest free (we’ve talked a lot about interest – it’s the extra money someone charges you when they loan you money. If you loaned me $20 and charged me 10% interest, when I paid you back I’d have to pay $20 plus $2 which is 10% of $20). I worked really hard and paid my Mom back in 1 year because I didn’t want to be in debt...but then later I thought about it. It was an interest free loan, meaning I wasn’t paying my Mom anything extra to borrow that money from her. PLus, she didn’t need it back right away. What if I had taken that $5000 I made in that year and invested it in something that made me some extra money?? In the end I still would have paid back my Mom the full $5000 she loaned me PLUS I would have MADE some cashola for myself! That is an example of a good debt: using debt to my advantage.

Borrowing From the Bank
Going back to our ‘buying a house’ example for a minute: most people would never be able to afford to buy a house if they had to pay the whole thing themselves (most families don’t have $250,000 or more just lying around!!). The only way is to borrow money, and the bank is a place very willing to do this because they MAKE money on the interest they charge.

Should You Pay Back Fast?
For the record, the money a bank will loan someone to buy a house is the CHEAPEST money you can borrow pretty much anywhere. What I mean is that the interest rate is usually really low, compared with other ways to borrow money. The banks do that because they want LOTS of people to borrow from them and pay interest. I’m not going to go into lots of detail about this because it is complicated, but let’s just say that when you get older and get your own house, a LOT of people will tell you to pay back that loan as FAST as you can and I’m not so sure about that. Just like the example with my Mom’s loan for my car, if I have an opportunity to borrow money for a low interest rate maybe I shouldn’t be in such a hurry to pay that loan back... if I can turn around and make MORE money on an 'investment' with the extra money I would use to pay back my loan faster, I could end up not only paying back my loan but making some extra cash in the meantime! 

Please note: this ONLY works when you are disciplined and get a good solid investment that will MAKE you extra money. If you use that extra money you wanted to pay off your loan faster for unecessary things or to just basically goof off, you will get yourself into a LOT of trouble and end up paying MORE. Most people haben't learned how to invest their money and make more than what they pay back to the bank so it is NOT a good idea for them. For you it could be, if you learn about investing and educate yourself on some of these concepts. It can be a powerful way to make money when you know what you are doing. There are also a LOT of people who took the time to learn and are getting very wealthy with this concept!

Bad Debt
This leads me to the topic about debt. Bad debt is any debt that you are paying where you aren’t making more money from the money you have borrowed. Huh?? Let me explain... so we know that good debt would be borrowing $100 from me when I charge you 5% interest (which means you’ll pay me back $105) where you turn around and loan that money out to another friend you have for 10% interest (so they pay you back $110 and you end up making $5 from my money). That is good debt: making money by borrowing.

Bad debt is borrowing $100 from me at 5% interest to buy a bunch of 'stuff'... you have just basically paid MORE than the stuff is worth (because you owe me an extra $5 in interest). That may sound simple now, but many people do this over and over, with lots of money through credit cards and bank loans (with much higher interest rates!) and then they wonder why they never seem to get any closer to being wealthy.

What NOT To Do
I have spoken in past articles about credit cards where companies offer you loans at a very high interest rate. It is one of the WORST things you can do to yourself. Companies convince us we need stupid stuff, so they loan us money (that we don’t have) to pay for it all and then they charge us HUGE interest amounts so we wind up paying WAY more than the thing we bought was worth. DO NOT DO THIS!! I have given many tips on how to be a saver in these articles and I don’t know how else to say it. Learn good habits with your money. Don’t spend all that you make/have and for goodness sakes, DO NOT spend MORE than you have by borrowing! You are setting yourself up for a life of being broke!

Here’s a website in Canada if you think your family, or a friend’s family, may need some help managing debt (sometimes a loan is also referred to as credit, that’s where the term credit card comes from).

Wrapping it Up
The really sad part of debt is that many regular people (like you and me) do not handle it very well and shouldn’t really have any. Even with buying a house, many people think it is good debt but it too is bad debt if it doesn’t put money in your pocket every month. It helps people to own a house so it’s a good thing overall. Just know the truth and don’t fool yourself. Most people abuse their credit cards and bank loans to buy things they don’t need and get themselves into trouble. Don’t be like most people, take charge of your financial life and form good habits now that will ‘pay off’ for your entire life.

5 TIPS to Getting Wealthy

  1. Look for good debt opportunities (but do your research and get help from professionals!)
  2. When you get a credit card pay it off in FULL every month, not just the minimum!!
  3. Don’t spend more than you have; make sure you ALWAYS save a certain percentage of the money that comes to you, even if it’s a twoonie from $20...it’s a GREAT habit to get into.
  4. Don’t listen to people who are broke or in debt - if they aren’t self-made wealthy people living the kind of lifestyle you’d like to live, why would you take advice from them?? They don’t know any more than you do (and in many cases, they know even less).
  5. And one last thing...don’t listen to everything your bank tells you. Although there a lot of great people working for banks that really care about their customers, the bottom line is that banks are around to make LOTS of money off of us.


To your wealth!
~ Brian


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