Debt is a double-edged sword. It can make quick work of various problems or be used to quickly build wealth. When used improperly, it tends to cut off the head of its user.
-Kelechi Iwuaba (yes I quoted myself 😏😉)
This post is 923 words, a 4-mins read.
Debt is a four-letter word that we all try to hide from. However; even if you hide, it remains. Worse yet, it grows by feeding on your choice to hide from it.
Debt is like a tumor that if not immediately eliminated, grows and infects every other part of your life. It is a virus that does not understand boundaries. You give debt an inch and it will take a mile. It takes advantage of your small concessions and buries you.
Debt should never be taken lightly. It is to be eradicated as quickly as it is introduced. Debt should never be taken without a plan on how it will be removed. There should NEVER be an acceptance of it in your life.
There are different types of debt. There are debts that are beneficial and debts that are detrimental:
Beneficial Debts
These are debts that if used properly can enable you to make or grow income and create wealth. Examples are: Student Loans, Mortgages, or Business Loans.
Key words are "if used properly". When these debts are not used in the right situations, they quickly become the next type of debt.
Detrimental Debts
These are the debts most of us have. These are the debts that steal our freedom and bind us in chains. These are the debts that far too often we joke about having but never do anything about. Examples are every and any debt that has ever or is currently a burden.
The worst of these are Credit Cards, Auto Loans, and Personal Loans. They are the worst because these usually have the worst interest rates attached to them. Also, these are debts that typically are for consumption items. Which means you cannot take the item back to wipe out the debt.
How to Take On Debt
"Begin with the end in mind" - Stephen Covey
Although my preference would be for us to never take on any debt. That is unreasonable and unrealistic in the world (specifically country) we live in. There are plenty of good reasons to take on debt. Some examples:
Not everyone has the ability to cash flow through college and not all of us got scholarship to pay for it
I know almost no one who has the cash to buy a house
Depending on where you live in the US, you probably need a car to have the ability to get to work and make income
Growing a cash flowing business
I want you to notice what is not on the list of reasons to take on debt:
Experiences: concerts, sporting events, travel, Bachelor/Bachelorette trips, parties
Goods: clothes, shoes, electronics, jewelry etc.
Weddings, Engagements, Bridal Showers
New Car when your old car is still good
Untested business ideas
Regardless of the reason you may choose to take on debt, it is important that you plan your exit strategy from the beginning. Having an end in mind, helps you to never overextend yourself. Here are a few examples:
Student Loans
Never take on more loans than what you expect your first year salary to be
This will create a limit to help you make decisions about what school to go to and also help you when deciding a major
This also means you have to do research to know what your career choice pays
This can help you find alternatives to end up with a better outcome
Auto Loans
Use the rule 20-3-8
Put at least 20% Down on the car
Financed for no more than 3 Years
Your total monthly car payment can be no more than 8% of net income
Includes: insurance, gas, etc.
This rule does not apply for luxury vehicles.
For those either pay cash or pay it off in 1 year
Mortgage
For your first home, Put down at least 3-5%.
For any other home, 20% or more
Factor in the additional 3-5% for closing costs
Use the 25% Rule
Don't spend more than 25% on house payment
Including: Principal, interest, property taxes, home insurance, PMI(Private Mortgage Insurance)
Plan to be in the home for at least 5 years
Other costs to think about: Increased utility costs and miscellaneous maintenance, repairs, and upgrades
You will need a large emergency fund
Business Loans
Do you have a proven business idea?
Have you tested the business idea?
Will the cash from the business be enough to cover the loan principle, the interest, and also give you a profit?
Can you bootstrap the business?
As someone once told me, " In Business, Hope is not a strategy."
If you cannot answer these questions, don't take on debt.
Credit Card or Buy Now Pay Later
If you do not have the cash for an item you are considering putting on a credit card or using a buy now pay later service
JUST DON'T
Debt can be a great tool when used with boundaries and limitations.
Remember Generosity > greed
God Bless You
✌🏾
Recommended Reads
Nick Maggiulli, The Never-Ending Then, "If you can appreciate the past, live in the present, and plan for the future, then what more can you ask for?"
Morgan Housel, "A Few Things I'm Pretty Sure About", truths that have never changed and will never changed.