CAREER & MONEY
IS DEBT A 4-LETTER WORD?
By Donald Broughton
As chief Market Strategist, Managing
Director, and Senior Transportation Analyst
for Avondale Partners, Donald is a frequent
guest on CNBC and Fox. He has been
recognized as a top stock picker by The W
all
Street Journal, Fortune, Zacks and StarMine.
The definitive answer on this is, “yes and
no.” It’s not the debt. It depends entirely on
what you are using that debt to buy. Most of
us need to change the way we use debt, and
the way we think about it.
Let’s start by properly defining debt. Most
people think of debt as an obligation to pay
back money in the future, which it is, but
it is better to think of it as someone selling
you money. Debt, credit, and a mortgage
are all merely someone selling you the use
of money that you didn’t otherwise have. If
you use that money to buy a depreciating or
disappearing asset, you are not only foolish,
but will end up a poor fool. If you use that
money to buy an asset that is appreciating in
value or generating cash flow at a rate that
exceeds the cost of that money, you are not
only wise, but will end up being rich enough
to have people think you are wise. It is
really that simple.
Let’s start with a couple of examples:
Example #1: Most of us love getting a deal.
Finding something on sale, at a special price,
is part of the thrill of shopping for most
people. You find that special dress and pair of
shoes that will make you feel special on your
date this weekend. And, what’s even better,
it’s on sale… fifty percent off! So you buy it,
using a credit card. To keep the math simple,
let’s say the purchase is $100. If you pay off
your credit cards in full each month – that’s
great! That is what people who are wealthy
and people who will become wealthy do.
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But, let’s say you don’t. For purposes of this
illustration, let’s pretend you are the average
American with credit card debt. Those who
carry the balance over month to month have
an average of $15,600 in credit card debt. If
you pay $520 a month and don’t charge any
additional amounts, you will have completely
paid off your credit card debt in three-and-ahalf years. That’s assuming there are no annual
fees or any other additional charges, which
rarely happens. Credit card issuers are very
good at adding on little fees that fall below
most people’s “willingness to fight” threshold.
What is that dress and a pair of shoes worth
in three-and-a-half years? Probably nothing,
because after wearing them a number of
times, they will start collecting dust in the
GAZELLE WEST
closet until thrown away or given to charity.
Let’s face it. Even if you are really disciplined
about selling clothes that you don’t wear at
your local consignment shop, no one ever
became rich that way.
count the business days,” he actually joked.
Today, after going public, that company’s
equity is worth more than $4 billion and
the cash produced by that company’s assets
continues to pay down the debt.
I know. This sounds harsh. What if you
simply took three-and-a-half years to pay off
your $100 outfit? Well… then you will have
paid full price - $200 for your outfit including
interest. Was it such a great deal?
That is how rental property works. If you buy
the house or apartment for $100,000 (again
to keep the math simple) and after putting
twenty percent down ($20,000), you are able
to collect enough rent to pay the mortgage,
the insurance, the maintenance and upkeep,
then in thirty years the mortgage will be
paid off and you will own the property. Over
thirty years, assuming real estate appreciates
at a five percent-a-year pace, a $100,000
property becomes worth over $400,000. Plus
a $400,000 property should generate over
$35,000 a year i