How Debt Can Make You Wealthier
A lot of people took my Bootstrapping post at Escape Velocity to mean I am anti-debt, where in fact in specific instances I am cautiously pro debt.
What I am against is using debt to fund acquisition of additional overhead.
What does that mean?
Look at what happens when a river of outside investment or other forms of “other people’s money” comes into a business:
- Fancy equipment
- Fancier offices
- Influx of payroll to create mini empires
- “Brand” heavy advertising
- they load up on liabilities that put nothing, or very little, into the bottom line.
This happens with people too. What happens when people win the lottery? Most seem to burn through their cash fast. They are left with very little to show for it.
Then look at what a well-managed bootstrapped company looks like:
- Managed overhead
- Direct “profit” oriented advertising
- Restricted hiring
I’m not saying this happens in all instances, but I have seen enough to know which path I prefer.
Acquisition via Assets
What I am suggesting is if you want something, think about bringing in new additional income to cover it. In the above mentioned article I talked about using a product launch to pay for conference trips, and a planned launch that would pay for a new truck.
A couple of people scoffed that a product launch would pay for a truck, but here is how you could realistically do it, and it will help make my point about not being anti-debt.
- Find the truck/widget/product you want to buy
- Discover what your audience would like to buy or needs help with
- Work out the monthly payments on the finance
- Divide the monthly finance payment amount (eg. $400) by 30 ($400/30 = 13.3)
- You now have the daily amount your new product needs to generate ($15 or so)
Providing you can make one sale per day then you will cover the loan for your new acquisition. Sell more or increase the price and you are into profit.
It doesn’t have to be a product launch, that is just my go-to strategy www.indov88.net. You don’t have to buy toys and gizmos either, it’s actually very cool to buy an asset that will pay for itself. Perhaps an income-producing website or a non-internet investment.
The best part? Once the loan is paid off your new asset can continue bringing in income or you can re-invest, and that is when you get the real benefit.
My point is, rather than these new acquisitions being a drain on your resources, think about it the right way, and even with debt, they make you wealthier!