Capital debt & consumer debt: Not all debt is the same

October 29, 2020

Adjectives can really make a difference! A flower can be described as “pretty”, which brings different pictures to mind depending on where you live. People in the Midwest might think of sunflowers. Oregonians might think of Rhododendrons. If you change the adjective to “wilted” a different picture comes to mind, though the flower might be different. It’s the same with the word “debt”!

Consumer debt relates to purchasing goods that are consumed and do not produce new products. When the granola bag is empty there is no residual value left. If you put the purchase on a credit card and do not pay off the balance, you will forfeit a future purchase because you now need to service the debt. Do this long enough and you will end up broke with nothing to show for it except an empty bag.

The purchase of canned beverages with a redemption deposit might be a hybrid illustration, especially if they raise the deposit return on bottles you previously purchased. On the other hand, if you borrow money to purchase a lawn mower to start a yard maintenance business, this could be good debt even with an interest rate charge. The cash flow from mowing can pay for the lawn mower and provide a possible additional return for your labor. This is called capital debt. It can be positive--as long as the capital choice is a good choice. Buying a home is a capital debt that can eventually generate net worth. Thus, debt can be good or bad depending on the adjective.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.