Why Do People Fear Debt?
November 16, 2024
Why Do People Fear Debt?
Debt is a funny thing. Most people have it. Most people need it. And most people fear it. Why do most people fear debt?
They Fear Debt Because Debt Controls Them.
This is where most people are. They fear debt because it controls their lives. Humans (and all animals) naturally fear anything that traps them.
The Wrong Kind Of Debt
We use credit cards to buy depreciating assets and consumables like televisions, clothing items, and sadly sometimes groceries. There’s a much longer list that I could go into but you get the point. Paying the minimum amount due every month makes it impossible to pay off.
We over finance cars using 72 month loans on a vehicle that only lasts 48 months and that we get tired of in 24 months. We trade them in when we still owe more than the vehicle is worth so we roll the balance over into the next car loan. This is a horrible trap that is almost impossible to escape. Paying off the car early is sometimes the only way out.
Being trapped by debt is the biggest reason for fearing debt and it is completely understandable.
How do we stop fearing debt and avoid being trapped? How can we help our children avoid being trapped by debt? There has to be a new way of thinking about money. Actually it’s not new. It’s just not well known. We aren’t taught this in school. It’s something that wealthy people have known for generations. They may not have given it a name but they practice it all the same.
Momentum
It’s the name of this newsletter and it’s the name of my podcast. They live Financial Momentum by making sure that the money they borrow creates positive cash flow and/or increasing asset values. They use credit cards as a convenience for a purchase but pay them off at the end of the month. My business credit card gives me hotel points so we rarely have to pay for hotel rooms.
There’s an old saying
“If it depreciates lease it. If it appreciates, buy it.”
J. Paul Getty
When I looked up this quote to verify the source I found people picking it to death. I had no idea the quote had become so contentious. I’ll just say in general it is true. Especially if you own a business. There is no gain in buying a depreciating asset unless you are buying it for your personal pleasure or you can get a tax benefit.
Many years ago when I worked in healthcare I performed a procedure that used a $2.5 million imaging device. The medical practice did not buy that equipment. They leased it. Buying it would have been like buying a $2.5 million car. It depreciates fast and would be worth far less when it became obsolete which would only take five or six years.
The Right Kind Of Debt
On the other hand, buying a rental property or a business using debt makes much more sense. This kind of debt produces positive cash flow and momentum in your finances. Wealthy people use part of the profits from their business to buy these types of assets so they can make even more money. The momentum builds and their holdings grow.
I often talk about the difference between being rich and being wealthy. And there is a difference. It can be illustrated by this:
“A rich person buys a new Mercedes. A wealthy person buys the dealership.”
Unknown
A rich person is simply a high income earner. I know many of those who have no real wealth. But they have a lot of debt. A lot of the wrong kind of debt.
On the other hand, I know many wealthy people who earn a high income and have built great wealth. They too have a lot of debt. But it’s the right kind of debt. It’s the debt that buys assets that produce positive cash flow and high value appreciation. Find these people and follow their example. Master debt so it does not control you. Learn about Financial Momentum and get control of it. If you don’t, it will control you.
Financial Momentum is how the rich get richer (wealthier) and why the poor get poorer.
Thanks for reading!