Debt is something none of us get out of in our lives as it comes in many forms. Already as young kids we tend to have some debt to friends after doing a candy run to a local store and someone lost or forgot their wallet. When we think about debt in general the consensus tends to be towards an acceptable form to finance things and a totally normal thing to do. Very few of us are able to buy a home without a mortgage and this has become the norm in more or less all countries. Various options of credit are advertised to us on a daily basis, from larger to even smaller purchases. Debt, one of the main drivers for our economy to function and grow but let's have a closer look at what this all means.

The good

Debt can be used in many forms to get faster to some wanted goal you want to reach that requires financing. For a young adult buying their first home, it is rather hard to save enough money to buy one with cash, especially in the modern world. It is doable but would require patience that very few people have nowadays as there is a much faster way to achieve the goal. Debt can be used to balance out costs that a company has for example and keep from going totally out on cash. There are many who say that there is something called good and bad debt. Good debt is something that you use to gain some asset that increases in value over time, as housing tends to do. Bad debt is said to be buying assets that depreciate over time, a classical example being a car. There are ways to use debt and credit to create wealth over time if used smartly but when looked from the perspective of personal finance, there are not many positive ways to use debt in my opinion, except buying a home and even this has its limits.

The bad

I want to first say that I am not by all means a zero-debt crusader, debt has its uses in the world but in the world of personal finance and the level of an individual, it has become far from a healthy way to finance your lifestyle. This is the main problem with debt in the modern world, your lifestyle is rarely on par with your income when you are in debt and to solve this issue of getting what you want, when you want, more debt comes to rescue. The instant gratification mindset people have nowadays is the main driver of getting into more debt than you should. It is an easy thing to go to when an urge or impulse of need has got over you. It is also made so easy for you that using this option is only a few clicks away but the aftermath is never that easy as it costs you time and health to get rid of it. The risk that taking debt brings is something that very few understand until they are in the hole and trying to climb up. There are not many things as an individual you can use debt for that can actually generate wealth without a high risk. This being the reason why in my opinion a reasonable mortgage is the only acceptable debt to have as an individual.

So when to use debt?

This part I understand depends much on where you live and how your taxes work and it is also a bit more advanced way of doing finances. I have mentioned now multiple times that debt is not a very good thing in my opinion as an individual. It tends to be that companies or other types of legal entities, have a much better taxing system than individuals that can be utilized. In the picture below you can see the structure I would use to try and avoid risk as an individual regarding debt.

What this shows is your wealth in total, the large ball, you as an individual and the legal entity that you also own but functions as a separate entity of you. The small ball inside you as an individual has a mortgage in it and the occasion credit card payment you need to pay when booking flight tickets online that you pay fully off next month. This should be all the debt you have as an individual. The legal entity or company is where things get more interesting. This part is where you invest, take debt against assets it owns and reinvest the debt/gains. The legal entity is the one that is taking the risk of debt, not you as an individual directly. What this means is that you take out money from the legal entity to yourself when you need to as a dividend or other payment forms but other than that, all the investing and risk is dealt by the legal entity. This is all more advanced financing and not maybe for all of us, but it is good to remember this structure when wanting to step up your investing and feel ready for a bit more risk and reward. For most people investing as an individual into our pensions and index funds is more than enough and no need to take these types of risks. Just remember that the individual investments should be done from your income, not use debt to increase these.

The crazy

Debt is baked into our everyday lives on many levels, even if we do not always even notice it. Want to go buy a new TV and there's an option to pay in small monthly payments in just 6 months but take the TV home today. You get the TV now but you pay a much higher price on it in the end. The instant gratification mindset and society we live in nowadays makes this choice totally rational and normal. Only issue is the debt starts accumulating from different places if not paying attention and the recipe for financial struggles is ready. In many countries, especially the US, you even have to pay such a high price for education that you will use many years worth of annual incomes to just pay this back. This is one way to force people into the employment market as it is the “safer” way to get income and to be able to pay the debt. Our everyday lives and even our long-term employment paths are driven by debt in many parts of the world. We are paying back money that is printed with machines day and night and has technically no value. The value is how you see it as the user of debt, was the education worth it or was the hurry to get the new TV such a great value that the higher price is worth paying? The cost and benefit of debt can be visualized the following way:

In the left ball is the world you live in without debt, you have space to stretch and make changes into the direction you are going. The more debt you have as an individual the less space you have to move and make changes. Simply put, your world gets smaller as long as you have the debt as you are forced to pay it back one way or another. What people do not see quite often regarding debt is exactly this: the world shrinks around you as you are forced to stay in a job you hate or keep working full-time even if part-time would suit your lifestyle better. Your ability to react to volatility in life becomes much less flexible and the amount of stress when volatility happens increases. Volatility can come in many different forms, financial, health, war, world wide pandemic, family members health or ability to create income. Volatility is something that will happen, there is no way to avoid this in life. The question is how much are you willing to take risks in the long-run as the crystal ball does not exist that tells you when something is going to happen. Want to have more flexibility and less stress as an individual or get things now with debt and shrink the world you live in? This is the choice we have regarding debt and instant gratification.