The Purpose of Debt
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It seems that nowadays everybody carries some amount of debt. Some people go into debt to start a business, some go into debt to obtain an education, and some go into debt to make large purchases. With opportunities for financing and loans everywhere to be found, it is no surprise that young people can find themselves drowning in debt without ever even seeing it coming. Misuse of debt leads to some of the worst financial disasters: foreclosures, bankruptcies, and even divorces. With all of the dangers of debt, why do people still use it? What is its purpose?
Before discussing the purpose of debt, it is important to emphasize what debt is not. Debt is not a shortcut to buying luxuries you cannot afford. Recently, I have seen many people using debt for this purpose. These people almost always end up regretting it later. Sure, that new motorcycle, nice car, or big screen TV might seem nice now. However, the interest you will end up paying on it will seem awfully ugly when it comes time to pay it. Too many people see debt as a way of obtaining luxuries now. They rationalize the use of this debt by saying that they will have the money later. However, this is often untrue. With the uncertainty in the job market and unexpected emergencies lurking around every corner, there is no guarantee you will have any money later. Not to mention that a large part of that income will be eaten up by nothing more than the interest you will be spending on that purchase. Many people find that a few months after the purchase was made, they owe more money on the purchase than the current worth of the item. Good financial sense? I think not.
So, if debt is not about buying luxuries you cannot afford, what is the purpose of debt? Debt is a tool used to start a profitable investment. Have you ever heard the phrase “It takes money to make money”? Sometimes, this is absolutely true. Unfortunately, some opportunities in life simply do not come free. For example, a prospective engineer simply is not going to make it into the field without a college education. A college education costs a lot of money. Many people do not have the money to pay up front for an education. Since a college degree will help the prospective engineer make more money in the future, going into debt to obtain the degree may be a viable option. Likewise, someone starting a business may need to take out loans to build a profitable company or a family may need to take out a mortgage to buy a home that will grow in value over its lifetime. Each of these scenarios represents an investment–something that will make the owners money in the long run.
But, what about emergencies? Surely emergencies can present appropriate times to use debt. To that response, I would argue that debt is not necessary if you are prepared and have a healthy emergency fund. It is essential to plan for the unexpected by putting away a portion of your income into an emergency fund. That way, when your car breaks down you can get it fixed or replace it with a cheap used one. That way, you can pay for that emergency dental procedure. That way, you can make it through a few months of unemployment. For those people who are very young and have not had time to establish a healthy emergency fund, debt may be the only viable option in the case of an emergency. However, I must emphasize that this is a use of debt by necessity. This is not the true purpose of debt.
So, next time you are considering going into debt, ask yourself, “Will this purchase cause me to make or lose money in the long run?” If the answer is “make”, then debt may be a viable option, although certainly not always a necessary one. If the answer is “lose”, then the argument is over: do not go into debt. Debt can be a useful tool if used appropriately, but it can also be a dangerous weapon if used inappropriately. Decide carefully.
What is your philosophy on debt? Do you agree or disagree with the comments above? I would love to hear from you!
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