Borrowing Money Can Be a Good Thing

Yes, our National Debt is at $21 trillion (as of April 30, 2018). You may ask yourself, “How did we get here?” Now I can’t answer that question in a blog, but I can tell you that whether it’s corporate debt, government debt, or personal debt, it all starts the same way.

A corporation says, “We need an influx of cash.” So, they create a ‘bond,’ sell it to whomever will buy it, and use the money to grow the company. If they can’t find a buyer, they’ll raise the bond’s interest-rate until they can find a buyer. The higher the interest rate, the riskier the bond. The only way this increased debt doesn’t become a burden is if it results in increased productivity. For example, the corporation purchases a new plane that can carry twice as many paying passengers.

Our government says, “We need an influx of cash.” So, they create a ‘note,’ sell it to whomever will buy it, and use the money to grow the country’s GDP. But let’s say the government (our Treasury Department) can’t find a buyer. If no one will buy the note, then the Treasury will ask the Federal Reserve to buy it. In other words, they’ll ask the parents for the money.

The Federal Reserve agrees to buy the note, but it will have to print money to pay for it. The only way for this to not become inflationary (too many dollars chasing too few goods), is if productivity grows enough to accommodate the rise in the money supply. This is because increased productivity creates more goods.

Now, your adult child says, “I need an influx of cash.” So, they go to a bank, take out a loan, and use the money to grow their personal development. If the bank won’t loan them the money, they’ll go to you, the parent. This is fine, but if this borrowing of money doesn’t result in the child becoming more productive, (i.e., able to support themselves) they’ll be back asking you for more money.

The key words are GROWTH and PRODUCTIVITY. It doesn’t matter if you’re a corporation, the government or an adult child. Whenever you borrow money for anything other than to generate growth and productivity, it results in a debt burden that can become overwhelming. So next time you borrow money, ask yourself:

Will this debt generate growth and increased productivity?

If the answer is no, then start SAVING for that goal instead of borrowing.

Gail Gill, CFP®, Worley Erhart-Graves Financial Advisors