What Being Debt Free Might Mean for Your Future

We live in a credit-based society, one where accumulating assets often coupled with accumulating accompanying debt. Buying a home? Sign on the line for a 30-year mortgage. New car? A bit of money down, plus a five-year loan. Starting a business? Visit your local bank for that small business loan. Even buying stocks, many do it with a margin account. Such a strategy may work—until an economy slips into a recession. Then accumulated may weight heavily on
ones budget and may lead to missed payments, calls from creditors and tarnished credit scores, if not worse.

What would it mean to be debt free? It’s probably been so long for many that it may be tough to fathom such a concept, but it would mean two things. For an individual, it would mean only paying cash for assets wherever possible—purchasing that car outright or putting off the purchase of that flat-screen TV until you can pay it in full. Operating in such a way has considerable benefits. For one, you may be able to negotiate better deals for the assets being purchased when you’re paying cash. But the prime benefit would be you then own it, and no finance company can come after you for it. Additionally, a low-debt liability means you aren’t as likely to get caught in a bad credit situation if circumstances turn against you.

You may have noticed that, like individuals, corporations often operate while maintaining debt, albeit on a much larger scale. While maintaining varying levels of debt as a corporation can sometimes be advantageous, such as allowing a corporation to effect an acquisition, more debt means more liability—and as we’ve seen in the last few years, that liability can have fierce consequences. Those consequences may lead to financial impairment and may carry right on through to the investors who can lose considerable money through a company’s debt management.

Some companies, however, have differing management philosophies. Apple REIT Companies (Real Estate Investment Trusts) management philosophy, for example, is dedicated, in part, to maintaining relatively low debt.

Especially in this economic climate, it certainly behooves investors to do all they can to operate their own finances as debt free as possible. It is equally  mart to seek out investments that operate in the same manner. Being debt free, in both cases, may mean a much brighter future.

By Martin Walcoe, SVP, David Lerner Associates

Material is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. (DLA). This material does not constitute an offer or recommendation to buy or sell securities and should not be considering in connection with the purchase or sale of securities.

 

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