Are You a Slave to Debt or its Master

Are You a Slave to Debt or its Master?

Is debt good or bad? Well, it depends on how you pay for it. One thing is for sure – this topic is a lightning rod. Some people are diehard proponents of leverage and debt, and believe that financial success is in many ways driven by debt. Many others, most notably Dave Ramsey, believe and teach just the opposite. They think that he who borrows becomes a slave to he who lends, and that debt puts financial success in jeopardy.

This is a difficult and multifaceted conversation, but let us try…

Monetary System and Debt

First, I have to note that we live in a debt society in which the currency is fiat, money supply grows as a function of something called fractional reserve banking, and health of the economy is in large part a matter of something called velocity of money. Theses are all interesting, and in some ways sinister topics, but I have no intention to write about those in this post in any detail – I invite you to do research. What all this really means is that if borrowing stops, economy dies – we nearly experienced this in 2008…

Basics of Money

Think of money as a flow, which is why we call it Cash Flow. now, picture yourself inserting a mesh filter into this flow of dollars – what happens?

Let’s say there are $100 in the flow of money, and the filter that you’ve chosen is good enough to capture 10% of this flow – this means that $90 will pass through the filter and emerge on the other side while $10 will stick to the filter. Do you have this imagery?

You Are the Filter

Now, realize that you are the filter, and the amount of money that you can capture is  a function of several things:

One – how able you are to put yourself in the path of the money flow?

Two – how effective of a filter you are?

Three – the magnitude of the flow of money.

Let’s just say that you work hard and are able to position yourself in the path of the money flow, so number 1 on my list is taken care of. Let’s also say that as a filter, you are able to filter out 10% of the flow. What can you do to catch more money in this case?

Well, there are but 2 things:

One – you could improve your filter, and instead of 10% of the flow, catch 15%, or 20%. This could be a viable solution, though this is quite difficult to do.

Another option is simply to position yourself in a larger, thicker, faster flow of money where more dollars are flowing faster through you. In this case, even if you are able to catch only 10% of the money flow, the dollar amount that settles with you will be larger simply due to the increased flow.

For example, if the flow of money which passes through you increases from $100 to $500, then by capturing 10% of the flow you now will be able to retain $50. And if the flow of money increases to $5,000, then you will retain $500, etc.

So – the question then becomes:

How do I increase the flow of money through my filter?

And, while it’s not the only answer, one of the primary answers is:

Leverage and Debt

Income-producing assets, such as rentals, cost money, and unless you are independently wealthy and have an unlimited supply of cash, you will need to leverage debt into acquisition of real estate. Real estate, by the way, is a prodigious filter, and the more of it you control, the more money flows through you.

Thus, debt is the key!

But, Dave Ramsey is Right

Yep, in the most pure sense of the word, debt enslaves us. Having to owe someone something gives them power over us.

How to Reconcile the Two

So – on one hand, debt is necessary for growth, as illustrated in my “money mesh” analogy. But, on the other hand, debt enslaves us. How do we reconcile the two ideas, because they are both right…?!

Well, there are only 2 ways to avoid a life of servitude due to debt:

One – You can avoid debt all together, but this will more than likely inhibit your growth in a debt economy.

Two – You can deflect the responsibility for this debt away from you and onto someone else…

That second item is interesting. The focus here is on the debt service, and not the debt in and of itself. Understand, the thing that enslaves you about debt is that it costs money every month, and if you are spending your hard-earned W2 income on debt, then two things are true:

For one thing, this is money you could be saving and/or investing, which you are not. And more importantly, if for any reason you cannot make the payment, you will be in trouble.

Should You Use Debt?

Simple – you have to have someone else make your debt service payments for you. Look at it this way:

When you borrow money, it makes you a slave to the lender, but only in a sense that you have to make payments and eventually pay the loan back. However, if you manage to rig things up so that you are not the one making those payments, then you in essence deflect the serfdom away from yourself and onto someone else.

Consider investment real estate – why is it so good?

Because it is a prodigious system by which to deflect responsibility for debt service away from yourself and onto someone else. You take $10,000 cash out of your checking account and go borrow $90,000. You buy a 4-plex for $100,000. Your debt service on that $90,000 loan is about $520/month. Congratulations – you are now enslaved to the bank…

But, you turn around, rent those units, and make so much money that having paid your mortgage and other costs, you manage to put cash in the bank. Congratulations – you’ve deflected the essence of your serfdom (paying on your loan) away from yourself and onto your tenants.

Question – does this mean that you’ve now enslaved your tenants, who work hard at their jobs so they can pay for your mortgage…? What’s more, once you grow large enough, then above and beyond paying paying for your mortgages, the tenants pay for your very life style, your vacations, your kid’s medical bills, and that Tesla you drive!

Conclusion

I am aware that some of the terminology in this article is less than palatable – serfdom, slavery, etc. But, regardless of how it makes you feel, this is the reality. In a debt economy someone owns, and someone is owned. The basic question is – which side of this table do you want to sit on…?

Whether you are a slave to your debt, or its master depends on who pays for it!

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8 Comments

  • Brian – Rental Mindset Reply

    This is so important – too many people are brainwashed by the “debt is bad” argument that they don’t even evaluate when it makes sense. I like how you describe it as a filter, great way to visualize it.

    • Ben Reply

      Agreed…

  • Mikhail Berlay Reply

    People brainwashed that “debt is bad”? how come than 60% of people does not have $1000 in bank to cover emergency. Take away credit cards and ppl will go crazy. Delay payroll over weekend and people start jumping out of windows. I’m glad that 2 years ago i came across Ramsey, thanks to him I debt free now and working on emergency fund. I think most investors will tell you that having back up funds and control over budget is a MUST. By Kiyosaki don’t talk about it, the only idea is leverage. Just remind you that Ramsey went through over leveraging and his idea were born after pain he suffered from banking industry.
    Maybe living in debt society is wrong?

    • Ben Reply

      Maikhail,

      I remember seeing employees people jump out of windows when Lehman went up in smoke. I am not sure how much debt those people had, but I am pretty sure they had no income-producing assets, and with their salaries gone many jumped out of the windows…

      Leverage is an integral piece of how wealth works in a debt economy. It is, naturally, a sword that cuts both ways. But, with most living expenses being fixed to a large extent, you just can’t save your way to prosperity. You’ve got to push the top-line, and you’ll need leverage to do it 🙂

  • David D. Reply

    What an excellent article Ben and a great visual as well. I never thought of it as that way – a mesh. This has got to be one of my favorite articles on cash flow.

    • Ben Reply

      Thanks so much for reading, David!

  • Gareth Reply

    Great article Ben – an analogy is so much more effective as a teaching device than intricate descriptions. I agree wholeheartedly with your reasoning. In fact your hypothesis is easily provable using MIRR as a metric of the investment model.

    • Ben Reply

      Yep!

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