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- An amount of money that you owe to a person, bank, company, etc. <\/em><\/li>\n
- The state of allowing money to someone or something. <\/em><\/li>\n<\/ol>\n
In other words, debt is defined as something borrowed or owed.<\/p>\n
This type of definition then leads to sayings like, \u201cAvoid debt like the plague\u201d and \u201cAll debt is bad, dangerous, or scary.\u201d Oftentimes, we\u2019re taught that having everything paid off, or being totally debt-free, is true financial security.<\/p>\n
Related:<\/strong> Another Way to Use Real Estate Debt Wisely<\/a><\/em><\/p>\n
Maybe it\u2019s actually fear that causes us to feel this way — fear of losing what we worked so hard to accumulate. Or, maybe it\u2019s the fear of not being able to pay our debts.<\/p>\n
This supposed feeling of security if an asset is paid off doesn\u2019t necessarily mean that the asset is any more productive nor that it is any more secure (especially if insurance is being properly utilized).<\/p>\n
Are We Really Afraid of Debt Because We’re Afraid of Expenses?<\/h2>\n
In a recent article, I covered the attributes of a Scarcity Mindset<\/em> vs. an Abundance Mindset<\/em> (\u201cHow to Uncover Amazing Deals by Simply Changing Your Mindset<\/a>\u201d). I believe that the drive to get completely out of debt is closely related to the Scarcity Mindset, as focusing solely on reducing expenses can be quite limiting.<\/p>\n
Focusing more on production may be less limiting and, therefore, is more closely related to the Abundance Mindset.<\/p>\n
Varied Definitions of Debt<\/h2>\n
Many people have to distinguish for themselves between their wants and their needs. Teachers like Dave Ramsey, author of The Total Money Makeover<\/a><\/em>, profess brilliant strategies to help folks who\u2019ve lost their way to get their financial lives back on track. One such strategy is to first have an emergency fund set aside, and then to develop a plan to whittle away at the smallest debt, and then to proceed to attack the next largest debt, and so on and so forth.<\/p>\n
Other gurus, like Robert Kiyosaki, author of The Cash Flow Quadrant<\/a><\/em>, discuss the differences between Good Debt<\/em> and Bad Debt<\/em>. Robert wrote that his Rich Dad would often say, \u201cEvery time you owe someone money, you become an employee of their money. If you take a 30 year loan, you become a 30 year employee, and they may not give you a gold watch when the debt is retired.\u201d<\/em> Rich dad did borrow money, but he did his best to not become the person who paid for his loans.<\/p>\n
Good<\/em> Debt<\/em> was debt that someone else paid for you, and Bad Debt<\/em> was that\u00a0which\u00a0you paid for with your own sweat and blood. This is why he encouraged rental properties — because the bank gives you the loan, but the tenant ends up paying for it.<\/p>\n
For me, it’s not that I believe the normal definition of debt is all wrong, but I prefer the accounting definition of debt, which is:<\/p>\n
Debt = Liabilities > Assets <\/strong><\/p>\n
Debt is not just any form of borrowing; it\u2019s simply having liabilities greater than your assets (things that could be converted to cash). The opposite of debt is Equity, having assets greater than your liabilities.<\/p>\n
For example:<\/p>\n
![\"assetsandliabilities\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2014\/11\/assetsandliabilities.jpg\" "\\"\\"")
<\/a><\/p>\nAs you may see from the example above, to me, true debt is when your assets are less than your liabilities.<\/p>\n
I\u2019m also a believer that the true path to wealth is to increase cash flow<\/em> and that our focus should be more on creating more assets than liabilities. After all, aren\u2019t your tenants paying off your rentals? So, why not fully utilize your mortgage interest deductions and property depreciation?<\/p>\n
Replacing Debt with Productive Liabilities<\/h2>\n
- The state of allowing money to someone or something. <\/em><\/li>\n<\/ol>\n