In some families, all debt is a real obsession, owing nothing to anyone is a high priority value.
In others, one juggles from month to month with overdrafts to be reimbursed from all sides. All accounts are red, and when pay arrives, it is – at best – used to reset accounts.
Debts are good and bad
First case: you buy your vacation on credit. It doesn’t matter if they were ultimately good or bad. In three years, when you are still paying them off, their benefits will be long gone. But your credit organization doesn’t care a lot about your distant memories, it wants its money!
Second case: you have stabilized your life, you have a job and perhaps a spouse and children and you know that you are not going to move anytime soon. It’s time to buy your main home. Unless you have inherited or won the lotto, usually, the amount of this purchase makes it impossible to pay cash. You are going to borrow and the reimbursements will be in the amount to be reconciled with rent. Besides, you can count on your banker not to legend you more than is considered reasonable in relation to your income and your other financial commitments… bankers do not like risks, it is well known. Here, it’s more in your interest because it won’t put you at risk either!
Third case: you have decided to invest in something that pays off. It can be real estate, a business … I am not talking about betting, but investments. You know exactly what it will bring you. You can go to a banker (of a different type from that of your bank agency for the loan on your main residence) who will, in view of the expected income, be able to lend you money. There are two cases here. There are those who calculate monthly payments that will be completely covered by income. And then, and this is unfortunately often the case with plans that bear the names of ministers and which are supposed to boost real estate and earn you money, the monthly payments may be higher than the expected income. “It forces you to save,” they say with a knowing smile. In fact, it is entirely up to you to choose.
So, good debts or bad debts?
The first case is called consumer debt. These are not bad debts, they are rotten debts from rotten people. Not putting your finger on it is theft, racketeering, extortion… yours.
If you are already caught in it, it is imperative to get out of it and it is your highest priority in terms of personal finance. There is nothing else you can do until it is resolved.
It is often much shorter and much less painful than you think. But that requires sitting down, thinking a bit, making a plan and sticking to it. There are good and bad ways to go about it. This will be the subject of other articles, and maybe even a guide and ready-made tables to make things easier.
The second case is debt traditionally considered good. Your banker will tell you that you are building up capital. We will see the concept of capital in a very different light. For him, he considers this as a guarantee (bankers adooooorent guarantees, it reassures them because they know that if it goes wrong, there will be enough to recover their money). For us capital is what pays. But your principal residence not only does not make you money, but it costs you money.
These notions of capital will also be taken up so as not to be confused with what ordinary people – financially uneducated – call capital. This distinction is extremely important, because it is what makes the difference between making a fortune or not.
The third case is interesting. There we are already in the investment. But we see that there are investments that cost and investments that pay off. In our view, an investment that costs is to be totally banned. Only a profitable investment is a good investment. And if you present yourself before a capital supplier (banker or – preferably – other) with this attitude, he should not only understand you, but also know that he has in front of him someone who understands how to enrich. A good point for you!