How To Manage Debt

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How To Manage Debt… and Make Yourself Extremely Rich

by Mark Skousen, Chairman, Investment U
Friday, December 02, 2005: Issue #491

It’s easy to see why the U.S. is said to be in over its head in debt, government and individuals alike. In November alone, the public debt ballooned another $83 billion.

Spending by Congress and the Bush administration is out of control, and their spendthrift habits are a threat to the economy, the stock market, the dollar and our standard of living. (Plus, it causes legislators to raise taxes.)

I also think most Americans overspend and undersave on a massive level. which could lead to financial trouble and even bankruptcy for many. Earlier today, the numbers on personal savings in October were released – at negative $61.5 billion!

But while government and consumer debt may be a problem, in the world of business, debt can be a blessing. Let me explain how to manage debt and make money doing it

Borrowing’s Most Profitable Role

Properly managed debt can be highly rewarding and can pave the road to financial independence.

Take real estate, for example. Jack Williams, an old-timer, once told me something I shall never forget: “Want to make a million bucks? Borrow a million dollars, and pay it off.” In most cases, he’s right. A monthly mortgage for your home or house rental is a forced savings plan, and even if the value of the property only keeps up with inflation, you’ll end up rich. (Fortunately, most real estate has kept ahead of inflation.)

I know. I’ve done it many times.

In business, borrowing money or issuing bonds involves risk, but it’s a leveraged and fast way to succeed in the corporate business world. The vast majority of publicly traded companies have some form of debt, mostly to their advantage.

And don’t forget what constitutes the opposite side of debt. For every debtor or borrower, there is a creditor or lender. Yes, there are millions of Americans borrowing to the hilt on their credit cards, bank loans, student loans, etc. But who is making those loans? Millions of savers and investors, banks, insurance companies and other financial institutions, and businesses with retained earnings.

So, while it’s true that national debt levels are at all-time highs, savings for those on the other side of the debt are also at record levels. But this is not to say that there is no danger in borrowing money. There is. So let’s look at the best ways to handle it.

How To Manage Debt: Five Rules for Turning Borrowing Into Your Advantage

1. Avoid consumer debt as much as possible. Use debit and charge charges rather than credit cards. American Express, which you have to pay off every month, is better–and easier to manage–than a Visa or MasterCard.

2. Set up “automatic investment plans” (AIP) to make sure you put aside 10% of your paycheck or income every month. Charles Schwab and other brokerage firms offer AIPs in no-load mutual funds. AIPs put automatic pressure on your budget to keep from overspending. Plus, they help you build liquid assets every month – funds you can draw upon for investments or business expansion.

3. Buy used goods. Make purchases on e-Bay, for instance, and don’t pay retail. Used cars are much cheaper than new ones. You can save a bundle.

4. Take full advantage of credit card checks that allow you to borrow money instantly for business or investment purposes. Do not use them for consumer goods or vacations.

5. Be reasonable in buying real estate. Put up a sizeable down payment (preferably 20% or more). Buy real estate that is easy to sell.

Good trading, AEIOU,

Mark

Today’s Investment U Crib Sheet

For more on how to manage debt and wealth, read The Richest Man in Babylon, by George S. Clason. A classic written in 1926, it will show you the way to wealth without taking too much risk with excessive debt. I recommend it to all my students, no matter how old or how wise. (I just listened to it on tape this week, and learned a lot.)
Did you know? The U.S. personal savings rate is calculated by subtracting expenditures, such as personal consumption and interest payments, from disposable income. The figures are released by the Bureau of Economic Analysis (BEA), and can be viewed here. Also, the “public debt,” which is the money every level of the government owes, is updated daily by The Bureau of the Public Debt.
And while we’re on the topic of debt and overspending, especially by the government Empire of Debt, a new book form the team that conceived the international bestseller, Financial Reckoning Day, confronts head-on many critical concerns about the position of the United States as the world’s leading economy and its great military might. For many years, the United States has been the country from which others sought advice, money and a high return on investment. At the same time, Uncle Sam has descended from being the world’s largest creditor to its greatest debtor. Why the paradox? Learn more here.