A Little Story About Debt

There was once a company that made a lot of money. The owner paid himself $30,000 per month. Things were great for two and half decades. Month after month, the money kept rolling in.

Then, a huge economic crises struck the economy. Demand for the company’s product disappeared. Sales crashed. Expenses had to be cut. Employees were laid off. Salaries were reduced. Things were bleak.

In the midst of all of this, the owner took out a huge loan against his house. He injected the cash into the company. This would keep things afloat until the economy turned around and things got back to normal.

“Great”, thought the accountants. No more telling vendors that they can’t be paid. More money for marketing to boost sales. More money to develop new products. More money to grow the business. Right?

Wrong. The money was borrowed to keep the owner’s salary in tact. It was astonishing. The man had borrowed money in order to continue consuming at the same level as always. Somehow he thought that running the debt through the company changed the nature of the transaction.

After a few years, the borrowed money had been spent. What was there to show for it? A few things: A huge note payable on the balance sheet, a sizable interest expense every month, and photos of exotic islands from vacations that the debt had financed.

The debt wasn’t spent on anything productive. It was spent on consumption. After a couple of years time, the owner had to cut his monthly pay by two thirds just to keep the doors open.

Demand never recovered and there was no financing available to develop new products or hire salesmen. The owner would have to settle for a permanently lower standard of living. He consumed his future.

Such is the nature of debt. If you borrow money to consume it, you are sacrificing your future to the present. Good times now, hard times to come.

If you use credit for something productive, you can pay yourself well in the present and provide for the future. But don’t forget, there is only a single productive use for borrowed money: providing products that people will actually, voluntarily, pay for, and that you can earn a profit on. If you’re not doing that, you’re wasting funds and consuming your future.

Be careful when you borrow money. Ask yourself, will I use this money for something productive? If not, consider the consequences. It is up to you whether you’d prefer to give up the future for present satisfaction. But at least go into it with your eyes wide open. Also, don’t forget that it is immoral to squander other people’s futures by borrowing in their name.

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