BLOGS

Debt brings the future into the present ... at a cost

Byron Moore

Just the other day, one of my son’s friends, Grant, called me with a business question. I got to know Grant during his undergrad years, and quickly saw that he would make a sharp businessman. Not too long after graduation, Grant went into business with his father. He was excited about the prospect of building a family business and optimistic about their success.

Byron Moore

However, he soon realized that he and his father had different views on debt. On the one hand, Grant’s father was totally against it. But on the other hand, Grant believed there was nothing wrong with debt if they could afford it.

“So where does debt fit into business?” Grant asked me, struggling to choose the next right step.

I told him what I’ve told many businessmen, parents, and friends.

“Debt is a time machine.”

Sometimes that’s a good thing. Sometimes that’s a disastrous thing. But it is always a powerful thing.

Debt brings the future into the present…but at a cost.

For the businessperson with an idea of how to make money, debt can create that opportunity right now, rather than waiting until she can save enough money to make that idea a reality.

For the young father, it can mean putting his family in a home in a safe neighborhood while the kids are still young, long before he otherwise could have saved the money to provide anything but a rented roof over their heads.

For the consumer, debt can mean he can buy whatever his heart desires (right now!) with little or no thought as to what the immediate gratification of that desire might ultimately cost him.

The best question for Grant to ask isn’t, “Is debt a good thing?” Rather, the question ought to be “is debt worth it?” Sometimes the answer is yes. Many times, the answer ought to be no.

Here are a couple of helpful questions Grant can ask himself to know if he’s making the right choice:

Is this opportunity debt? Is he considering borrowing money so he can take advantage of a unique opportunity? This would be the case if he were considering buying a business or a money-making business asset. Or perhaps a home became available at a very attractive price of the sort he’d always wanted to live in.

This is sometimes a good use of debt, but only if he is a good judge of opportunities.

Is this lifestyle debt? Is he considering borrowing money so he can obtain something sooner that he will ultimately consume?

This is rarely a good use of debt. With lifestyle debt (otherwise known as consumer debt) he is really paying the price for his lack of discipline to save money. Consumer debt is simply savings in reverse, paying the lender back at 18% or more so he can have that gear or power tool…right now.

The trick is not to avoid all use of debt but to determine when bringing the future into the present is simply too expensive.