November 27th, 2008
Staying Debt Free and Leveraging Liabilities
One of the best ways to increase your cash flow is by understanding the proper definition of what debt is, and acting accordingly. In America, we are often taught that our biggest asset is our home. But if this is really the truth, then why are so few people utilizing their homes as income producing assets? The true answer to this question is because so many people in the world are severely limited by misunderstandings in place regarding debt. When we understand what debt really is and what debt really is about, then we are much better prepared to unleash plenty of previously unutilized potential in order to increase our production and our ability to not only stay debt free, but also to make our money work for us in more effective ways than ever before.
Are you capable of giving a clear definition of what debt is, or what debt is all about? We are taught by so many financial leaders that debt needs to be avoided, but without knowing what debt actually is, how can we avoid it? How can we know whether we should actually be avoiding it at all?
The most common definition that is used to describe debt is any “borrowed money”, but this is a false way of defining debt. Without knowing what debt really is, can we really avoid it in the first place? More importantly, without knowing what debt actually is, could we potentially be avoiding something that is essential to creating financial health in the first place? Without knowing the correct and true definition of debt, we could very well be avoiding something without actually knowing what it is that we are avoiding. People who are avoiding what they believe is “debt” may actually be avoiding some of the most critical available knowledge regarding finances, some of which could be preventing them from being prosperous. It is also this knowledge that could get them out of bad debt and allow them to leverage the good.
The true definition of debt is this: Debt is the negative difference that exists between your liabilities and your assets. Debt is essentially having more liabilities than you have assets when the two are compared on a balance sheet, and debt is characterized by the difference between these figures.
The best way to understand these figures is through the use of balance sheets. The purpose behind the use of a balance sheet is to itemize your assets and your liabilities in order to determine where you stand as far as an equity position or a debt position is concerned. For example, should you own a home with a market value of $300,000, but you still owe $100,000 to the bank, then the common definition of debt would say that you are $100,000 in debt, but the true definition of debt would say that you actually have $200,000 worth of equity because despite the liability, you still have more assets than liabilities.
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