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The Other Two Kinds Of Debt

December 6, 2018

The Other Two Kinds Of Debt

“Any corporation, private or governmental, that wishes to provide for a sound and equitable continuity of its business must take steps towards the systematic retirement of debt immediately after it has been incurred. Postponement of all payment for property or privileges by those who presently enjoy their benefits is calculated to bring uncomfortable consequences to them or those who succeed them.”
— Engineering Economics, by C.R Young. 1949
(Read on Guerrilla-Capitalism.com)

We frequently hear pundits and talking heads talking about how short-sighted government policies and unfunded entitlements are in essence “stealing from the future” or at best “borrowing from the future” and I found myself thinking about the difference between the two ideas.
Normally when we think about “the two kinds of debt” we think productive versus unproductive debt. Exemplified in the Richard Kiyosaki “Rich Dad / Poor Dad” series, we learn that productive debt is that which you incur and then use in a way that will help pay itself off.
Examples include vendor or bank financing on buying a business that you would then pay back with the earnings from said acquisition, something I’ve done a couple times over my career; or taking out a mortgage to buy an investment property. From there you would use the rent to pay off the mortgage.

I emphasize paying off the mortgage here as opposed to simply servicing the debt with minimum payments or interest only, and we’ll see why shortly. Contrast this with unproductive debt, which is borrowing money to go on vacation or buy consumer goods, or do anything else with it that leaves you with the bill afterward. As Kiyosoki frequently stresses, it’s the difference between debt that makes you money vs debt that costs you money.

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