Debt and No Debt: Both Have a Purpose

What Is Debt?

Before we begin defining debt, let's establish some ground rules and understanding first.

There are some things we, as individuals or business owners, can do; some we cannot; some that need more or higher education; some that require a lot of time; and some that require a license or permit. Also, there are things we would rather not do, and some things others can do better than we can.

Purchasing products has some of the same issues as services. One difference is that providing everything for ourselves would require ample storage for materials, products, equipment, and tools we may need. In addition, we would need to consider our time, labor, training, and other costs to create the product. And then there is the cost to own different things.

This is where trading and debt are introduced.

To have someone else do something for us, we have to, in turn, do something for them or give them something in return. It can be an instantaneous trade, or there may be a delay in giving them something in return. Thus, we owe them something, and that becomes a debt for us.

In many cases, however, when we have someone do something for us or get something from someone, we cannot pay at that moment. We become indebted to the other person. In other words, we owe someone something.

The amount owed could be paid in

• one payment at that moment
• one payment in a short period
• multiple payments based on a specified agreement.

Receiving an item and making payments over time is considered a trade or purchase on credit. However, there are instances where you make payments for something you will receive later.

Paying in intervals may also raise the cost to the buyer. This could include admin costs for tracking payments until the debt is paid in full.

The discussion thus far has involved two people; however, in reality, one person cannot supply everything another individual may need. It takes several. This means one could be in debt to many, which could lead to problems. For instance, if you paid the seller in full, you may not have enough to pay others. You may need to budget your outlay and pay only part to each individual. This is another example of buying on credit. It helps the individual but not the seller. To satisfy the seller, a loan could be requested, or possibly a credit card could be used. The seller is satisfied because they are paid in full. We have the product, but a debt still remains with the same rules:

• one payment at that moment
• one payment in a short period
• multiple payments based on a specified agreement

Purpose for Debt

Debt, as explained, is an obligation to repay for something purchased with a single payment or multiple payments over time. It would be great if we all had an abundant supply of resources to draw upon to pay for the products and services, but for most of us, that is not the case. Each of us could wait until we have the funds available; however, for many, the need or want does not permit it. Thus, we go into debt.  This may happen personally or in business.

There are many reasons:

• Accessing Major Purchases (business or personal): Debt can allow us to purchase something that would be difficult to pay for all at once, such as a home through a mortgage, a car, or a college education, without having to wait until the entire amount has been saved.
• Family growth: more food, living quarters may need expansion or possibly a different place to live, and education
• Handling Emergencies (business or personal): Debt can provide access to money when an unexpected expense has to be handled now, such as an urgent medical expense, necessary home repair, or an unexpected business expense.
• Transportation: Purchasing or repairing a vehicle when transportation is needed for work, family responsibilities, or everyday needs.
• Medical: Paying for medical care or related expenses when available resources are not enough to cover the cost.
• Vacation: Paying for a trip when the full amount has not been saved before the trip.

In business, it could be

• Business Operations: Debt can provide money needed to keep the business operating, including expenses such as payroll, insurance, taxes, supplies, inventory, equipment, or other operating costs.
• Marketing/Advertising: A business may use debt to pay for marketing or advertising when the cost occurs before the additional sales or revenue it is expected to generate.
• Business Growth: A business can use debt financing to purchase equipment, increase inventory, expand its facilities, add employees, or pursue other opportunities for growth without giving up ownership of the business.

In business or in personal life, debt can be used to meet an obligation or make a purchase. The person or business receiving the payment is paid, but we, as borrowers, remain obligated to repay the debt.

The purpose of debt is to bridge the gap between the financial resources you have available today and the income or resources you expect to have in the future.

Debt makes it possible to receive or purchase something today when the resources to pay for it are not fully available today.

Purpose for No Debt

Just as having debt serves a purpose, not having debt serves one as well. When you do not owe money to someone, the income and resources you have available are not already committed to making those payments.

Financial Freedom: You can choose how to spend, save, or invest the money you earn instead of having part of it committed to monthly loan or credit card payments.

Peace of Mind: Eliminating debt can remove the worry associated with upcoming payments, collection calls from delinquent/problem debt, or wondering how those payments will be made when something unexpected happens.

Increased Cash Flow: Money that was previously allocated to principal and interest payments becomes available for other purposes. It can be saved, invested, used for current expenses, or put toward something you want or need.

Economic Security: Without required debt payments, you may have greater flexibility when circumstances change, such as a loss of income, rising expenses, inflation, or an economic downturn.

What Debt-Free Means

Being debt-free does not necessarily mean the same thing to everyone.

Absolute Zero Debt: Having no mortgage, car loans, student loans, credit card balances, or other money owed.

No High-Interest Debt: Some people consider themselves debt-free when they no longer carry high-interest revolving debt, such as credit card balances, even though they may still have a mortgage or another lower-interest loan.

There is more to being debt-free than simply reaching a zero balance. What happens to the money that was being used to make those payments? What choices become available when that money is no longer committed to debt? And does being debt-free mean you should never use debt again?

Those are questions worth exploring separately, and we will come back to them in another post.

For now, what matters is understanding:

• what debt you have,
• why you have it,
• what it costs you, and
• what having or eliminating that debt does to the money you have available.

Once you understand those things, hopefully, you can begin looking at your own debt differently. The question is no longer simply whether debt is good or bad. The question is whether the debt you have is serving a purpose for you today and whether continuing to carry it still makes sense.

There is no single right or wrong answer to each of those questions. It will be different for each of us. The circumstances, needs, resources, and reasons for having the debt are our own. The purpose of this article is not to make that decision for you. It is to give you something to think about as you consider your debt and the choices available to you.

If reducing or eliminating some of that debt is one of the choices you make, the next question becomes what you can do about it. That is where we begin looking at ways to reduce what we owe.