Debit and Credit - Friends or Foes?

You can't talk about money without talking about debt and the problems that come with it. Debt is a term that has different meanings in our world today and is a term that is often misused. What creates debt exactly? Debt is a financial position where you have made a financial obligation and the only way you have to pay for it is from money you haven't made yet.

We measure our current lifestyle by monthly cash flow. What happens when you want or need to purchase something that you cannot afford to pay for in full with that monthly cash flow? You have two options. You either borrow money from your future lifestyle by draining your savings or you borrow from a lender like a bank or a credit card company and finance the cost over time with your current lifestyle cash flow.

If you don't have anything saved, then your only option is to borrow using a credit card which does not require collateral. You use your current job to prove your ability to pay for it. When you have no access to capital, it becomes easier to slide deeper into potential financial trouble having to pay high interest rates for a loan while still trying to maintain your current standard of living.

In summation, the use of credit cards, as an example, is debt if you cannot pay off the balance in full each month without being charged interest. If you don't pay it off in full each month, you are in debt because the amount you owe is not collateralized. On top of that, there are very few things that you can buy on a credit card that have the same economic value as they did when you purchased them.

What makes using a credit card a problem is that without collateral, you are buying things with money you have yet to earn and with no guarantee you will have the ability to pay back what you have borrowed. You are spending your lifetime capital potential before you have the money in your hands. People usually find themselves in this position when they have no other access to capital, i.e. savings.

What is debt in this context? It is an obligation on your future earnings. The better way to pay for things if you are going to avoid debt is to pay cash but there are problems with paying cash too that will get covered in future discussions. The reality is that you essentially finance everything you buy. You either borrow someone else's money and pay them interest or you use your money and give up the opportunity to earn interest.

Education is the difference maker in understanding whether debt and credit are your friends or foes. Next week's presentation will cover these topics at the Whitehall Library on Tuesday, September 12th, at 6 PM. Please come and join me as we discuss:

• Debt and borrowing

• Understanding credit

Future presentations will include topics such as taxes, inflation, qualified plans, home wealth and strategies to leverage debt.

If you are unable to attend the presentation live, you can request a copy of the presentation slides at http://www.treasurestateadvisors.com. You will also be able to reach me directly as well with any questions.