Perspective – Borrowing & Debt

April, 2021

“I didn’t even know what I needed until I went to the Mall!”

We might laugh at that comment, albeit a little nervously! We all know that is so true in our own life
experiences. We have heard the ad tell us that “You deserve a break today!” or “You owe it to yourself!” How
really do they know I need a break? Maybe I just sat around my house for two days watching sports or movies.
What I really need is to go and do some work!! And what does it mean to owe myself? More than likely, I owe
something. Maybe it is time to pay off what I owe someone else!!

Here is a little exercise for you. Have you noticed how many ads are in a commercial break on TV? Sometimes
there are over 15. When you see or hear an ad in broadcast or print media think about it for moment. How did
that ad make you feel? It seems that many of these advertisements are attempting to make people somewhat
discontent with the way they look, the clothes they wear, the car they drive or maybe the food they eat. Did you
start calculating how you could acquire what you didn’t need a few minutes ago? Did that calculation include
thinking about where you could borrow the funds you would need? Yes, you are right. We are going to talk
about debt in this article. How many of the following comments do you already know?

There is a difference between borrowing and debt. Debt can be understood as a long-term obligation and is
generally used for items or objectives that appreciate in value, i.e., houses or businesses. Borrowing should be
understood as short-term obligations for items or objectives that generally depreciate in value, i.e., cars,
consumer items, groceries or credit card purchases. It doesn’t take long to learn in life that a loan is much easier
to acquire than to pay back. When you borrow funds, usually the enjoyment of the items purchased is over long
before the pain of repayment is finished. In the end, excess consumptive borrowing will sentence a person to a
lower standard of living.

In the book of wisdom called Proverbs, King Solomon states that, “The borrower is servant to the lender.”
Whether you have a mortgage or a car loan, the lender has control. Another danger is that loans presume on the
future. If everything remains static, you can repay the loan in a timely manner. Yet the future is unknown at
best. No one needs to think farther than the last year for an example.

It should also be understood that lenders lend money because they understand the magic of compounding. In
your investment portfolio, compounding is definitely your friend. However, with your debt, compounding is your
enemy. Your debt is part of your lender’s investment portfolio. So, your lender has a good friend!

A final point to ponder…debt is always repaid with after tax dollars. That means that for a debt of 10,000.00 the
borrower who pays 20% tax on their income needs to earn 12,500.00 to repay the loan. That is a good
calculation to review before you make purchases that require debt. How much do you have to earn to repay
your debt…principal and interest?

No one is saying that debt is wrong…though some forms of debt may be better than others. Decisions to borrow
need to be calculated as opposed to impulsive! As is often reported, with concern, in economic analyses, our
current society has a love affair with consumer debt and alarmingly it may lead to economic disaster. Interest
rates are lower than most of us have ever seen. Wouldn’t you think that a better perspective is to take the
opportunity to reduce or eliminate debt rather than borrow more? JUST SAYING!!!