Thursday, April 10, 2008

Rule # 5 Good Debt Bad Debt

“The rich rule over the poor, and the borrower is servant to the lender.” Proverbs 22:7

If you reserve your debt for appreciating assets, your assets will always be larger than your debt.

There are only 2 assets that fall into the appreciating category, real estate and businesses. Businesses include both private and public companies. This means there are a whole lot of "things" that should not be purchased with borrowed money.

Robert Kiyosaki (Rich Dad, Poor Dad) has a great quote, "the rich only buy assets, the poor only buy liabilities, and the middle class buy liabilities they think are assets". Kiyosaki's definition of an asset is something that has positive cash flow, ie puts money in your pocket. His definition takes your house out the asset category as it takes money out of your pocket every month. Kiyosaki's definition of a liability includes all debt plus every thing else you buy that does not fit his definition of an asset.

My definition of an asset is anything that appreciates in value over time, again only real estate and businesses qualify. Anything that depreciates over time is a liability. Using debt to purchase "liabilities" means you pay interest to own something that eventually becomes worthless.

These "liabilities" include cars, everything inside your house, and every toy in your garage.

The key to increasing wealth is never borrow to purchase liabilities, and limit the purchase of all liabilities using cash.

Credit cards.

We discussed the effect that television has had on our spending habits and credit cards have given us the fuel to keep the buying binge going. It's a interesting coincidence that the tv moved into our living rooms in the 1950's and american express and visa issued their first cards in 1958.

Prior to the credit card there literally was no way to spend more money than you made. There were no bank overdrafts on personal accounts, there were no personal lines of credit. Once the cash ran out you were done.

The credit card is quite simply the greatest financial disaster known to mankind. Paying 21% interest or more on your groceries, clothing, furniture, holidays, gifts, property taxes, and anything else you can think of is financial suicide.

"Some things in life are priceless, for everything else there's mastercard."

Quite a statement.

You know what to do.

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