Debt: Future cash flows brought to the present!

October 15, 2020

Debt is the ability to bring future earnings to the present to be used for consumption or investment. For the privilege of doing this magical wonder the borrower is charged an interest rate for using the money. Debt can make the present seem better economically than it really is! Just ask any college kid granted a Visa card with a $5,000 limit. They seem to have the same purchasing power as someone who just got a paycheck.

Money borrowed and spent in the present cannot be spent again in the future. I have often called it “royalty for a season” and a “pauper for life”. My dad always told me, “If you cannot afford it today, you most certainly cannot afford it tomorrow plus 18%”. There is another old cliché that says, “The one with the most toys at the end wins.” Even if you believe the philosophy behind this statement, it cannot be realized with debt purchases. Cash always wins when buying consumption items. Debt purchases will leave your garage half full at the end.

Just a quick thought about American prosperity: Our country is currently in a combined debt of $55.9 trillion, including government, corporate and personal debt. Is it possible much of our present appearance of prosperity comes from having already spent the future?

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