Debt: money words series

Debit, debt and in debt? What about good debt and bad debt? Its all such a muddle and I have to have a check in with myself as to what all these different terms mean.

When I tell someone in debt that they need to commit to taking out no more loans and no more debt to stop borrowing even so much as a bus fare – followed by a look of complete bewilderment which I recognize having been there myself.

There are very little studies done on personal debt or the history of it. But if in the olden days I had been trusted to go to the market with the family harvest, i would have somehow come back owing something.

There are stories going back into history of people like me who landed the family, the farm or the estate in huge debt despite the weather and economic climate being good. Because I couldn't make sense of debt: how did I get here? Maybe it was just a poor investment? Or is it more?

But actually, I can thrive and become wealthy and be considered a huge success, as much to my amazement as anyone else’s. I don’t need to have gone to study at business school or work in finance, just don’t borrow – ever.

Secured debt may be a different story. Unlike unsecured debt, if I fail to pay back secure debt then I loose the item to the value of that secured debt. A mortgage or a lease on a car – are secured debt. In a Pawn shop it's the same thing. I get some money and exchange an item – if I fail to pay the money back the item is no longer mine and can be sold at whatever price.

This way I cannot get into debt without loosing the item the debt was for, which is why it is called ‘Secured Debt’.

Next time you are a ‘bit short’ and NEED to borrow some money, hand over a piece of jewellery, your laptop or bicycle, it does not matter as long as the value is way above wheat you are borrowing. Then if you don’t pay the money back you loose the item!

It sharpens the mind and focuses my attention. If I give someone a precious family heirloom in exchange for cash to a lower amount than I think its worth - boy will it hurt if I don’t pay the money back. It's that hurt which will make me wake up and get clear, did I really need that bit of shopping? Did I really need that taxi ride or whatever?

But what about my brilliant business idea that needs money to get it going? In my experience it’s the same principle. Borrowing money that is unsecured will kill of the brilliant idea faster than anything. One actor friend has lost all the money her father left to her, all the money her mother left her and all the money she made in her acting career.

When I ask her what the brilliant idea was, she tells me the fabulous office address, the wonderful furniture and the lovely staff, but cannot actually describe what the business is. There was no reason she could not have started the business on her laptop at home or in a café, and built it up slowly.

Successful businesses start off with a plan. The hard work is put in at the beginning by some skilled and hard-working. Then when it's up and running, investors will follow. Even they will insist on some security in the business itself.

If a family member or friend wants to invest in the business, again hand over something to the value of the investment. A microwave oven and a TV in exchange for the cash to buy a laptop, and then every time you want to watch TV there is a reminder the money needs to be returned. Obviously by far the best thing to do is to earn the money first.

Don't borrow or get any further debt unless you exchange the borrowing for the same or more than the cash. If things have got that bad that you have nothing, then accept that is the bottom of the hole and the only way is up.