If you search for “debt” at www.brainyquote.com you will find over 20 pages of suggestions including some of my favorites:
- Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.
- Henrik Ibsen – the same man that wrote “Peer Gynt” and “A Doll’s House”
- The United States can pay any debt it has because we can always print money to do that.
- Alan Greenspan – famous for giving us the term “irrational exuberance”
…and my No. 1
- What can be added to the happiness of a [person] man who is in health, out of debt, and has a clear conscience?
- Adam Smith – owner of the invisible hand
The very basics of “good debt” are when you make more money than the money costs you. A simple example would be a farmer who borrowed $1 Million from the bank at 6%; used that money to buy seeds and fertilizer, make payroll, operate their farm; and, then sell the crops to net a reasonable profit. Purdue University tells us the average 2015 to 2019 Operating Profit Margin is about 6% so in the above example, you’d need to pay all your bills and the bank and pocket $60,000.
Another case might be when you invest that same $1 Million and buy a rental property – maybe a small apartment building and borrow at that same 6%. Well, in rough numbers that money cost you $60,000 for the first year and if all your rental income and operating expenses resulted in a net operating income of 61% – or so say the folks at the National Apartment Association in October of 2020, that borrowing was an easy call.
And, of course, “bad borrowing” is when you’re throwing good money after bad. You have an old car you own outright and estimate your current “basis”, (the cost of the car you paid over time less the value it has given you in transportation), is $5,000 and you have to buy a new engine for $2,000 so now, your basis is $7,000 but the car only lasts you another year and you have to sell if for scrap of $2,000.
While these are all very basis examples, as business people running our companies and communities, we also have to consider:
- The roof on the school house is leaking…gotta have a new roof
- The state statute says we must have back up generators at city hall
- My accounts receivable are due in 90 days with payroll due tomorrow
Well, you get the picture. Three keys to managing your debt are your ability to:
- Generate Cashflow
- Increase Asset Value
- Operate Your Business and Community
My guess is watch the signs of the economy and size your expectations as best you can and let’s close with a quote from Albert Einstein:
Life is like riding a bicycle. To keep your balance, you must keep moving.