What is the first thing in your mind when you heard “debt”? Most of people will think that debt is evil, we need to avoid it. Yes, it is not totally wrong, but i will give you another perspective.
Actually debt is a tool, most of poor and middle class people will say that debt is bad. For rich people they will say debt is a leverage. The one who understand and use debt will be rich, and vice versa if you don’t understand it, you will hate it.
Let’s me describe why most of people hate debt. Debt is a sum amount of money that be given by someone or intuition in order to get an interest. Most of institutions will make their money work for them, that is why they are willing to give loan and hope they will get the interest.
Okay, so we know the rule. If you borrow money, you will return it with interest. The problem is starting, what do you use debt for? Most of poor and middle class use debt for buy something that depreciation the value.
For example, if you take a debt to buy a $30.000 car. At the moment you buy it, the car value will drop to $20.000. Unfortunately you still have to pay $30.000 with interest
Another example, right now if you see apple launching new iphone. You will see a lot of people willing to queue to buy it, even they have to take debt. The bad news, next year they will launch a new one and the one that you have now will be drop value.
How about rich people? Of course they also take a debt, debt is a tool for them. I give you simple calculation. They are now have a product $10 and they sold it $50, that mean they are have $40 profit. How they have an order 1000 unit, unfortunately their only have cash $1000. That means they only can make 100 unit. In order to fulfil the order they take $9000 debt and agree to pay $10.000 later.
If they don’t take a debt they only can make 100 unit. That mean their profit is $40 time 100 that mean $4000. With the debt they can produce 1000 unit. The profit will become $40.000 and after they pay back the debt $10.000, they are still make $30.000 netto.
That is how rich people use a debt, if you use a debt to generate more income, the debt can be a good things. Unfortunately, a lot of people don’t understand this and the make a debt to buy something that give a burden to them.
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