How To Understand Money and Debt

A lot of people in this world are clueless about the idea of money and how it works. To many, money is simply paper or coinage used to buy things. However, money goes a lot deeper than that. The concept of money is actually very simple to understand. A bill or a coin reflects actual value that is stored somewhere in the world, and has a corresponding value in gold or other precious material. With this view of money, one would better appreciate money, and learn to help increase its value rather than just spend and spend.

It’s an unfortunate fact that most people in the United States have incurred some form of debt. Majority of these personal debts are owed to banks and other businesses, in the form of credit card liabilities and mortgages. Moreover, even entities like businesses and even banks are indebted to other, bigger entities. With today’s economic downturns being caused by a mismatch in individuals’ and businesses’ ability to borrow with financial systems’ ability to lend, it pays to make good spending and borrowing decisions.

You need to spend money wisely these days. Consider well what things you actually need and what can wait until next time. It’s always convenient to just swipe your credit card to buy on impulse. But taking out a debt because you want to buy something fancy is not a wise decision.  If you are living beyond your needs and your means, your expenses are most likely exceeding your earnings. Then in this case, debt will only be a grave you will dig yourself in.

It is said that it is a mistake to treat one’s home and other similar properties as an asset, just because one owns and finds utility in it. Some financial advisors would tell you that anything that does not generate income for you is not an asset, but rather just a liability, especially with rising utility bills. Therefore, before you make any buying decision that will incur you some liability, you need to make sure that you can afford it. If you want to buy a house, can you afford the upkeep, the utilities, the repairs, and the property taxes? If you will buy a car, can you afford fuel, repairs, and maintenance?

On the other hand, the best way to treat debt is by resorting to borrow money for expenditures that would either give you positive returns, or for those that you can well afford with your current means. For instance, you might be setting up a new business. Borrowing money from the bank could help you get started. But in the long term, you will end up better off because of the income-generating opportunities your business will allow. Or, more simply, you can use credit for short term expenditures, and for those which you know you will not spend a lifetime paying off.

The important thing to remember is that you should have a positive cash flow at any given time. This means that the money you earn from salaries or from your business should be properly budgeted both for expenses and for paying off liabilities. Make sure you have money left over to save or invest. This way you don’t overspend, and you are able to manage credit wisely.

 

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