Something, typically money, that is owed or due. That is how the dictionary defines DEBT.
Without getting pedantic, Debt for Sovereigns is very different than debt for individuals and businesses. The min feature of this difference is that when a Sovereign takes on debt they have the option to reduce it by merely printing money out of thin air. This becomes increased money supply and therefor is Inflation. As good as as printing money may sound, it isn't.
Individual debt and business dent to a degree can be categorized as either Productive or Non-Productive. When a business borrows money whether through banks or issuance of bonds it adds debt to its balance sheet. A balance sheet is juts a statement of its assets and liabilities. Debt of course is a Liability. If the funds raised by assumption of debt are placed into service that produces goods and services which increase revenues and profits, it is Productive. If it spends these borrowed funds on big junkets for the executives, that is probably a safe one to call Non- Productive.
For Individual which includes families, the biggest debt is usually a mortgage. A mortgage provides necessary shelter and comfort and is Productive. Over time, though at interest, Real Estate grows in value (not always but generally). This is akin to a forced savings plan wherein every month little by little the principal borrowed gets reduced and becomes Equity for the owners. This is a sold approach to building wealth and many f the wealthiest families have real estate at the base of their success.
Second to a mortgage for shelter is the car. These vary greatly from practical get abouts to luxurious 200 mph exotics. Somewhere in between is the common every day sedan or SUV. Transportation is a necessity so this could be considered Productive in that it gets you to work and back, to soccer games, school and the weekend grocery shopping. But car purchases are notorious for losing a lot of their value when you drive them off the lot. So some of a new car's purchase is Productive and some in Non-Productive. A better approach is to buy an already depreciated used car. That isn't quite as easy today as it was in recent years due to inflation and supply chain issues. I still think a well researched used car purchase can be beneficial yet in most cases will require debt. I recall auto loans being 36 months or 48 on the long side. Now the starting point is 60 months and goes to 72, 80 and more. Yikes!
The big issue for Individuals and families is using too much Non-Productive debt. This happens on purchases of consumer items like flat screen TVs, expensive clothing, expensive vacations, expensive new furnishings, outside meals and more. Except for a few of these they all lose value rapidly. When a vacation is over all you have are the memories and cell phone pics. Sure, enjoying life is a must so a vacation can be great fun, create shared memories and refresh ones outlook. But by and large the expense of these consumed things is very high. A car loan might be 8-10% if credit is good but a vacation or flat screen TV could easily be 29%. Such items have little value in resale so you end up paying for them long after their useful life has past. Ouch!
I'm no Dave Ramsey here, but I say a better way to go is to save up for future purchases. The old idea of lay away is actually making a bi of a new showing. It's smart. Unfortunately the last generation or two and current one have a terrible case of Instaneous-itis. Wanting it now is never a good financial situation. Sales people earn their pay by getting you to buy now. Frankly, I try to avoid sales people because even I get tricked into buying something now that would be best put off. Often a little time gets rid of the itch and that saves money. Money saved is money earned but what about Inflation making worth less each day that goes by.? Good point but saving can become investing with the goal of getting a return on the money saved. If that return is equal or greater than the inflation rate you are doing pretty good. Right now that is easier said than done but I personally would rather save $1000 even if next year it only buys $900 of value because that still beats the 29% interest on a buy it now approach.
Of course, debt is tempting for the quick fix and some are responsible using debt but some are not. there are those who Buy Now and Pay Later. There are also those who Buy Now and NEVER pay. That can be happenstance or criminal. On the worst side of this is the shoplifter and now the mobs that take what they want and just walk out. That is a very bad sign for a society that touts itself as being one of law and order. Anarchy is never pretty.
I advise my clients on capital purchases of equipment, leasehold improvements, hiring and benefits and more. These are fairly straight forward because they can readily be assayed against being Productive or Non-Productive. If a business spends in the direction productivity even if borrowed money, that can be fine. If spends on excessive salaries, benefits, meetings in Cabo etc., the bottom line will suffer and that debt will be a burden.
My recommendation at all times but especially now, is to ask yourself BEFORE getting into debt, will the purchase be Productive or Non-Productive. The answer will give you the proper approach to making good decision at home and at business.
Best,
Donn Marier
DM-Your Own CFO