Creating wealth out of debt

Take the case of people living without any planning for the future and without budgeting their monthly and yearly incomes and expenditures, as it happens in most consumerist societies. Such people overspend and at the end of the month they face a huge deficit. To tide over such temporary inconveniences they borrow again from another source. This process continues and they get trapped in what is called a debt trap. The situation becomes so bad that there will not be any easy source for further borrowing. The credit rating of the person will also be the worst that no bank or credit card company will be ready to extend any financial facility. Day and night, such a person will be troubled by phone calls, mail, text messages, personal visits by recovery agents, etc. for recovery of the loans or debts that have already become bad debts - debts that are no longer serviced or repaid as per the agreed terms are bad debts.

They say, ‘debt is not bad, bad debt is bad’. The difference between a debt and a loan is often quite narrow. If debt is bad, loan is also bad. If we go with this theory, we will have to disapprove of most of the big business corporations in any country, every country. All companies and businesses have debts and loans to be repaid. Debt or loan is used to finance business operations that create further profits and wealth. The loans or debts are repaid using the profits generated. It is an ongoing process, getting into debts and getting out of debts. In the process businesses grow, and keep on growing. As businesses grow debts too grow! Once you decide to do away with all kinds of debts, you have to face shortage of funds and the business becomes one with no growth and then negative growth will follow. This is a very dangerous situation, worse than being in debts.

If this is true for businesses, it should be true for personal purposes too. And it is true if loans and debts are wisely availed and productively used. If you keep on taking loans or incurring debts in an unplanned way without any budgetary planning, you are bound to get into trouble sooner or later. Like the companies are doing, you too can use loans in a productive way. For example, you can buy a residential property with borrowed money and pay off the debt every month with interest in such a way that your cash outflow will be equal or nearer to the rent that you pay for your current home. When you pay off the debt in five or ten years, the property is yours and you no longer have to pay any rent throughout your life. Additionally, possibly, if you want to sell the house then, you can sell for a sum that is about a few times more than you pay now. That means you have created wealth too out of debt, apart from almost living free of any rent. So, debt is not always bad, but it helps to create wealth if wisely used.