Debt is a tool used by the wealthiest in America. Correction, it is a tool used by all America, but it would appear only the wealthy understand how to use it. This tool, when used appropriately, can be lucrative. However, when someone hammers a screw, it is not only useless; it is destructive. Not because the hammer is useless, it is just being misused. Hammers are good for nails, screwdrivers are good for screws. Debt is a tool, and similar to the hammer, it must be used appropriately. But how can one identify when debt is appropriate to use?
After studying the subject vaguely, I have seen one rule continue to resurface: reserve debt for appreciating assets. As mentioned before, debt is a tool. We should not squander it on depreciating goods. People do not get loans to buy chocolate. Credit card debt on designer clothing is the same thing. People will consume chocolate; and designer clothing will lose value. Not that designer clothing is bad, but it certainly is not worth going into debt for. Paying interest for a product that will lose value (depreciate) is a terrible idea! That interest is wasted, burned money. However, going into debt for appreciating assets is more understandable. Getting a mortgage on a house that will increase in value over time makes financial sense. As a Christian, I am fairly opposed to debt. That is to say, I believe when debt is called for, it should be paid off quickly. Certainly, most people cannot afford to buy a house in cash, and since homelessness is not an option in my book, I deem a house as called for. As a Christian, the question becomes; “What are my chances of return?” I do not gamble, so whether this debt is for an investment, or some other asset, I ask, will that asset appreciate in value? Not just a speculation if it will, (gambling) but a true due diligence of blank asset’s value. If the answer is “no it will not appreciate” then I must re-asses what I am purchasing.
It makes sense going into debt buying real estate. Debt also makes sense when growing a business. Real estate appreciates, and a business is scalable. I can get a return on both investments. That is not the case with Gucci clothing.
Debt is not a screwdriver. Avoid using it to buy depreciating assets.
Asher Sisneros 