Читать книгу Finance & Grow Your New Business - Angie Mohr - Страница 40

In order to make sure that you will manage your business debt appropriately, it’s important to first get a handle on your personal debt.

There is an old adage about good debt versus bad debt. Bad debt is defined as any debt you undertake to purchase things that do not grow in value. This would apply if you’re using your credit card or line of credit to go on a vacation or buy living room furniture or a car. Good debt, on the other hand, is debt that’s incurred to invest in things that will grow in value, such as your home, other real estate, and stock market investments. Conventional wisdom says that bad debt should be avoided or paid down as quickly as possible, but good debt is acceptable and should even be pursued.

The problem with this outlook is that it does not recognize that debt means risk for you, regardless of what that debt buys you. Any time you have required payments to make, you run the risk of not being able to pay them and thereby becoming insolvent or even bankrupt. When you borrow to invest, either in real estate or in bonds or the stock market, there is no guarantee that these investments will increase in the short term, which is when you have to make the payments. There is a danger that, if the value of the investment drops below what is owed on the loan, the loan will be called. In that situation, even if the investment is sold, you will still owe money.

Another investment “nugget” suggests that paying interest on investment loans in order to build investment assets is a good idea. As we have discussed above, all investment entails risk, whereas paying down your debts can give you a greater return on an after-tax basis. Let’s look at an example:

Your spouse has received a $5,000 bonus from his employer. You are considering whether to invest that in your investment account or to pay off the last of your credit card debt. Currently, the long-term investment return from stock investments is about 6 percent. You will have to pay taxes on part of that income, however, and therefore, your after-tax return may be as low as 3 or 4 percent. On the other hand, your credit card company charges 19 percent. Paying off that card will give you a 19 percent return after tax, as there are no tax implications of paying off debt. Not only is your return much higher, paying off debt gives you that return risk free. It’s a guaranteed return. Always keep this in mind when trying to decide what to do with windfalls and extra money in your budget.

I’m certainly not advocating that you do not have any personal debt whatsoever. Simply keep in mind that debt equals risk. As a small-business owner, you will be exposed to plenty of risk as it is, without adding to it on the personal side. Here are some things that you can do to get a handle on your personal debt situation:

1. List out all of your personal debts, the terms left on them, and the interest rate.

2. Rank your debts by highest to lowest interest rates. You will find that the highest interest rate debts are generally credit cards, retail cards, rent-to-own situations, and payday loans. The more the debt is secured by underlying assets, the lower the rate will be. For example, because the bank can take back your home if you do not make the mortgage payments, mortgage rates tend to be lower because the risk to the bank (not to you!) is lower.

3. Review your budget and calculate how much you can set aside for debt repayment.

4. Make a formal debt repayment plan. For each debt, you should know how long it will take to pay off (not just the minimum required by the lender). Start with the highest interest rate debts and pay them off as quickly as possible.

5. Stick to your budget! Make sure that you make the payments that you have calculated every month in order to be out of debt when you have planned to be.