"Good debts And Bad Debts...:" Of What Type Son The Debts That you Have?

 

For: Camilo Pinto
Publisher

Hello:

The suitable handling of the debts is a determinant factor in the possibilities of generation of wealth of the persons. Although in some cases they can be a big ally and an element of very powerful leverage, unfortunately, in my experience almost all the persons have bad debts that limit dramatically the possibilities of being financially healthy, prosperous and successful.

I am sure that everything takes root in knowing really the difference between two types of debts.

What are the good debts?

There are debts that are acquired to buy productive assets that manage to pay the cost of the debt and also they generate positive cash flow. I believe that that sounded a little complicated... in simple words, the good debts put silver in his pocket... make it richer.

I explain myself. Suppose that you ask for a credit in a bank to mount a business or a company. Let's assume that the financial cost of the debt is 20 % effective annual. This means that for every $ 100 that gives him the bank you will end up by paying $ 20 in interests.

Now then, if the business that you mounted gives to him to pay all the expenses, to pay the debt and anyway it generates a surplus or a utility, then the debt that you acquired is a good debt.

Saying of another form managed to turn his debts into profit. Does it sound well, no?

Gerardo Mejía, the director of the School of Business administration and Accounting of the National University of Colombia says about this form in the edition of June 29, 2005 in the newspaper The Time:

"... the ideal thing is to get into debt to acquire productive goods, which generate revenue... It talks each other of apalancar with the money of the others, projects that give a yield bigger than what these resources cost..."

The only thing that would be missing is to evaluate so profitable what his business is, but this is a topic of another bulletin... the important thing for the time being is that you used silver of another person to construct wealth. Namely you managed to begin generating wealth without proper resources.

The silver concept of another person, or since I call it POP is one of the most powerful levers that you will be able to use in his way of generation of wealth. (If you have checked literature in English on this topic very probably it will find this concept under the initials OPM - Other People's Money).

I believe it is very important that he knows that the fact of having good debts has an implicit risk. This risk happens in the suspense that this business or this investment that did and that is going to pay for the debt and generate utility, really behaves this way.

A thing is what one plans and other one what often happens. That is to say it is necessary to be careful with this financial leverage that the good debts can give because it can be a double-edged sword!

When does this happen?

When his business or investment does not give him the profitability for that you were waiting and this debt that was seeming to be a good raisin to be the worst!

With this I do not try to alarm it and to say to him that he should never choose to take debts that apparently are going to be good debts. On the contrary what I want to say to him is that there is a moment in the financial life of the persons in which this decision is a good decision, as well as there are moments in which it is not so suitable.

Everything depends on the financial structure of everyone; of the personal general balance and of P&G personnel. It is worth while, to check this information with a consultant certified in planeación financier before taking any of these decisions.

In general terms,

If you belong to the persons that he could not have organized yet well his personal finance,

If it spends more than it wins or does not manage to save any more than 15 % of his income,
If it does not use a budget like tool of planeación and control,


If it is not doing anything to construct his strategy of financial freedom, of education of his children, of personal education, of contingencies and of protection...

The surest thing is that you are not ready to enter the world of the good debts.

And what are the bad debts?

The bad debts extract silver of his pocket... make it poorer. Normally there are debts for consumption: to buy things, trips, consumer goods, etc.

What you have to understand is that he is paying very much more silver than the things cost and therefore his capacity of generation of wealth diminishes.

It is diminishing his cash flow or the quantity that can remain him at the end of the month. And it is with this quantity that you can be provided to obtain the targets that financier decreed by means of a process of planeación.

With this quantity that does not wear out at the end of the month the fact is that you also construct wealth, therefore, on having had a bad debt, his monthly expenses for concept of financial costs rise, what simultaneously diminishes his aptitude to be richer.

And what to say about the payments deferred in his credit card?

Many persons give him very little importance to this and decide to construct a life full of bad debts route credit cards...

Big error!

They base his decisions of indebtedness on the "apparent" low monthly quota that they have to pay and then they decide to buy this TV so nice that it has just gone out to the market or any thing that looks alike to him.

Namely they feel that they can handle the monthly payments and it is possible that they could, but they do not take his decisions of a way financially correct. Seldom they take the time to know that the financial cost that they are assuming can come in many cases almost to 30 % annual cash! (I say this with base in information for Colombia of the cost of the payments for credit cards deferred to 12 months).

And what is worse, they do not know the impact of this decision with regard to the targets that every who has like excellent and really important in his lives!

Namely the fact of progressively having this type of behavior and of habits repeatedly, can bring as a result that some important target or sleep that we have for our life runs the risk of not being fulfilled.

Now then, I do not mean that you could not give himself tastes. It is more I am 100 % of agreement that the persons we reward ourselves with things that let's want to have, but what I suggest the fact is that this is done of a way financially intelligent.

An example of this is across concepts like a Deferred Gratification. Although we will speak about this in another bulletin with major depth, on what this concept is based it is of buying to us the things that we want (of being a pleasure for us) when we deserve them to ourselves.

Some international experts with amazing financial results that I have had the fortune of knowing tell that a person deserves something when he can buy it of counted or with the credit card but like payment way, that is to say to only one quota.

Let's see it of another form: I have just said to him that the bank is receiving almost 30 % from him a year for to give him the silver so that you buy that that so much he wants to buy.

What would spend if it turns the things over and he will manage to invest his monthly saving to a consistent valuation per year of 30 %?

I give him the answer... you would do a lot of money with running of the years! And when I say to him very much, it is great... especially if we take up office that the inflation is supported about 5-7 % per year. (For the Colombian case in 2005)

He realizes that if this was like that, his real profitability would be of more than 23 % a year. This is a good factor multiplier for his money! Obviously to achieve profitability of this type of a consistent way is not easy at all, but what I claim with this example is that it sees the things from the opposite point of view; from the point of view of generating habits of wealth and not of poverty.

Namely instead of using that one extra the month in a bad debt, to use that one extra a month in some vehicle that is a wealth generator!

In conclusion, we must be very careful with the plastic money!

"With this system in general one does not buy productive goods, but elements of consumption that he does not need and ends up by compromising resources to one or two years..." Newspaper The Time, June 29, 2005

Recommendation: use his cards of alone credit as a way of payment! Namely to pay in only one quota and this way it will not take any type of financial cost as his buy!

One imagine for a moment how one would feel if it did not have bad debts.

	Would his life be less stressful?
	Would he sleep calmer?
	Would he smile more?
	Would it be of better humor with the persons of his family and of his work?
	Would this annoying sensation be eliminated below of the stomach typical of when one knows that it has many debts?

I am going to give him a few general recommendations that it can serve him that had left free of the bad debts that it has to credit cards:

1.	Establish how much remains him at the end of the month... what is his surplus of box that it can use month a month with the target to eliminate his bad debts.
2.	Do not acquire new bad debts. Use only his card as way of payment.
3.	Identify what is the financial cost of each of his bad debts in annual effective terms. To compile this information it can call to his bank and ask what the cost of his debt is. (If it has some question and is our client we can face it with great pleasure in the phone (571) - 6914692 or across an email a)
4.	Select the costliest debt in terms of annual effective valuation.
5.	Concentrate in paying to this debt of a monthly way. That is to say pay the minimal total of his card more the surplus that you determined that you could use month a month for this target of elimination of bad debts.
6.	Once full this debt, use the value that was paying of minimal total more the value that decided to destine to eliminate his debts and pay it to the minimal payment of the second debt.
7.	Repeat this procedure up to finishing completely with his bad credit card debts.
8.	Use the free cash flow (what was paying earlier in credit cards) to construct some important target for his life and that makes it every time financially healthier.

It notices: The previous recommendations apply for almost all the debts of credit cards. For some debts index-linked to inflation like debts in UVR for housing, etc. the previous recommendation not necessary is the best solution.

If by chance it has the question if it is better to use his surpluses of box (what remains him at the end of the month) to eliminate his bad debts or to invest for the attainment of some target (financial freedom, education of the children, housing, fund of contingencies, strategy of protection and risks, etc.) is NECESSARY that it has an appointment with a consultant in planeación financial because there are several points that must be analyzed to know what the best thing is and it would be irresponsible on my part to give him a suggestion and to say to him what is what more would be convenient for him without knowing his situation.

If you are our client and realize that it has many bad debts or does not know what must do, I recommend to him to call us (571 - 6914692 or to send to us an email for to establish how we can help it with a program of elimination of bad debts.

His financial life can be free of bad debts and probably we have the solution!



For his financial success,

Camilo Pinto
Publisher
Tel.: (571) - 6914692

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