Understanding Debt and Using it Effectively

At the most fundamental of levels, debt is the same as credit, but it just depends on which side of the agreement you’re on, i.e. if you’re the lender or the borrower. However, since we’re discussing the effective use of this credit from the point of view of the average person on the street, one can safely assume we’re going to be heavier on debt as the money you borrow than the money you lend. After all, the average person isn’t a certified financial services provider, licensed to make a profit out of charging interest for lending out money…

That, however, brings into focus a quick look at how the average person on the street can operate on the “other side of the fence” though, which is that of playing the role of creditor.

Savings accounts

With even the most attractive of savings accounts offerings though, the ability to assume the role of co-creditor along with your bank is limited in the returns you can make. Nevertheless, savings accounts, or even something like a savings pocket within an account such as a transmission or cheque account, make for a way through which to effectively loan out money and earn interest from it.

Again though, the earnings are nothing to write home about, with some of the best of these offering somewhere around 6-8% annual returns, which is probably well, well below inflation and falls well below what you’d need in order to maintain certain living standards you’ve become accustomed to.

So what this means really is that the money you’d allocate to this investment channel would be that money which would have otherwise sat in your account doing absolutely nothing at all. This would be money which you had no immediate plans for, whether to spend on your expenses or by way of investments. The thinking behind it is that something is better than absolutely nothing…

Clarifying what debt is

Credit or debt is simply an agreement which is made that a borrower will repay later the value which they’re being given access to now. So the lender puts faith in the ability of the borrower to come up with the monetary value of whatever it is they’re subsequently willing to give to the borrower right now. Since we’ve moved along with the development of a monetary system that involves currency and the digital representation of that currency, usually that value spoken of is directly denominated and measured in currency.

Using debt effectively

That brings into focus the fact that there’s a difference between good credit and bad credit, or good debt and bad debt. Borrowing channels such as payday loans can be used effectively for positive financial advancement instead of just getting you out of a sticky situation which essentially has you having to borrow money from your future self, to be paid back in the very near future of course – your next payday. If for instance you’ve identified a specific quick-fire business opportunity to take advantage of and you need some capital to buy stock, that’s another example of the effective use of credit. Taking out a loan to buy a big screen television would make for an example of bad debt, from the consumer’s point of view.