We live in a time when credit is easily available.
Whether you’re buying a home or car, going out to dinner with friends, or jet-setting on a vacation to Europe, you don’t have to have the money for whatever it is you are doing – you can borrow it.
The problem is, whenever you use debt, you are inherently doing one of two things. You are either stealing from your future, or you are adding to it.
A DEBT-DRIVEN SOCIETY
It may or may not come as a surprise to you, but American’s (and plenty of other countries) love their debt.
As of February 2018, American household debt hit an all-time high at $13.1 Trillion.
This figure includes mortgages, student loans, credit cards, and more.
The average American has 2.6 credit cards, and carries a balance of $6,375.
It’s safe to say that concept of debt isn’t going away anytime soon.
FORK IN THE ROAD
All debt isn’t bad, though. In a past article, I outlined how to tell if a certain form of debt is good or bad.
The basic premise is to ask yourself if the debt you are using is going to help increase your wealth, or diminish it.
ADDING OR SUBTRACTING
In recent years, I’ve been speaking about how the way people are using debt should be viewed: pulling your future wealth into the present.
If you are using credit cards to buy products that aren’t increasing your wealth, all you are doing is taking money away from your future.
As an example, if you are going to make $50,000 this year, and the same next year, you will make a total of $100,000 over the two years.
But, if you decide to spend $60,000 in the current year, you’ve added $10k in debt that needs to get paid next year. So, now you’ll only have $40,000 to spend next year (not even including the interest you’ll have to pay).
You’ve recognized that you do not have enough money to buy whatever it is you want, so you are borrowing it from a bank.
But someone needs to pay back that bank.
Every time you use debt, you are just putting a larger burden on yourself in the future.
DEBT EXTREMES
Imagine if you decided to go on a crazy shopping spree. You bought all of the most expensive designer items, and now you’re sitting with a huge credit card balance.
In fact, the balance is so large that your monthly payment takes up ALL of your left-over money after you’ve paid your basic needs like rent, food, etc.
In this example, you’ve taken ALL of your enjoyment from your future self and used it up in the current moment.
In this scenario, you are teetering on the edge of bankruptcy. One emergency away from not being able to make your payments – and then the house of cards comes tumbling down.
Clearly, this is the extreme. But every time you use debt you are moving yourself closer to this point.
ADDING TO YOUR FUTURE
On the other hand, if you were to use debt to help increase your wealth, you’d actually be increasing your future enjoyment. You’d be helping to make your life easier, more enjoyable, and less stressful.
One way to do this is to focus on creating additional streams of passive income. By doing so, you’ll be making any new purchase easier and easier.
A counter example to the one above would be buying rental property real estate.
A POSITIVE IMPACT
If you buy real estate, chances are you are going to use a mortgage.
let’s say you purchase a property that costs $165,000, and you use $41,250 for a down payment (most investment properties require around a 25% down payment).
But you were smart and found a property that had great investment numbers and would pay you extra income after all of the expenses (How To Buy Real Estate Like A Pro).
Now, every year, you are getting paid an additional $15,000 from the extra income the property is generating.
Sure, you added an additional $123,750 in debt to your finances in the form of a mortgage, but it’s actually making you richer each year!
This isn’t just a made-up scenario, it’s one of the properties I own with my brother. It’s real, and it’s making us money and helping to build our wealth.
A DECISION
Your success in wealth-building will be decided by your financial habits. When it comes to spending, you have to decide if you are going to use debt or not.
If you do, are you using it to add to your future, or steal from it?
Ask yourself this question on a regular basis. The answer will tell you a lot about how your future will look…
Capably Yours,
