Credit and Debt 101 - Week 3/12 Financial Bootcamp
Welcome to Week 3/12 of the Financial Bootcamp!
Today we will understand Credit and Debt!
So welcome to - Credit and Debt 101!
There is so much talk of “credit” and “debt” right now, but as with most topics in finance, the discussion turns complex and leaves most people scratching their heads.
What does it all mean? Why should you care?
Credit is the granting of buying power.
Debt is a promise to pay it back at a later date.
Contrary to popular belief, credit and debt are not evil - in fact, they can be good! Whether they are good or bad largely depends on what the buying power produces in terms of income.
Take a loan to buy a couch, that is bad. You won’t have the income to pay off (“service”) the debt. Take a loan to buy a delivery robot that earns you money, that is good.
You have the income to service the debt.
Income Growth > Debt Growth = Good
Debt Growth > Income Growth = Bad
Taking on debt is really just pulling forward future spending into the present. It reduces your future spending as you service that debt.
If you are earning more at that future date, that is fine! If you aren’t, you may be unable to service the debt (a “default”).
Economy wise, the key is that spending is used to fund productive activities that stimulate growth and enable us to service the debt.
Our global credit binge has set our course for a wave of defaults. This is a classic “debt cycle” and has repeated itself throughout history. We play with fire, get burned, then we do it again! So this is where we are and why it matters.
This concludes Credit & Debt 101.
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