Understanding Debt

Keep your life balanced by understanding debt.

By Lynn Torre, CFP®

Debt, in accounting terms, is a negative entry in your account.  All accountants know that for every debit there must be a credit.   This is why it is called a balance sheet.  In every transaction there is a debit and a credit on each side.  If a company has a reduction in inventory (a sale), it should also have an increase in income. (Proceeds from the sale)


When you provide a product or service to someone, you get paid in return for what the customer receives.  The value you provide to another is paid to you in cash of the same amount. This is a positive entry in your account and it keeps your money energy in balance.  For example, if you give a client a one-hour massage, in return, you should be paid the going rate of $75 for your service.  This is keeping the energy of money in balance and in circulation.  You were appreciated for your service and received that appreciation in the form of cash money.


Debt puts your account out of balance.  It stops the flow of appreciation and thus the flow of money energy.  Stopping the flow of money energy can play out in several different ways.  There are many different ways; but for now I will discuss only two. The most basic way is when you do not receive payment for the product or service you have given to another.


Continuing to use the massage as an example, you met the client for the scheduled appointment and provided them with the one-hour massage they requested.   When you are finished, the client says, “that was a fantastic massage but I am afraid that I cannot pay you today “.  Your heart sinks and you stand there startled.  Your mind races with self-talk.  What if the client doesn’t have the money to pay me?  They may promise to pay me later but what if I never get paid?  I didn’t go into business to be a bill collector.  I just wasted 1 hour of my time and effort.”


We all know that this would not be a good business practice.   We innately know that an IOU is not money in circulation.  In fact, as the one providing the service, you would probably have a bad feeling in the pit of your stomach.  You can literally feel the void, or the lack of energy that should be coming to you in the form of payment.  You were not receiving the appreciation back for the service you gave the client.


When you stop the flow of appreciation, you stop the circulation of money in society.  It makes you feel terrible.  The client has just created a debit in your account.  The flow of money energy has been blocked.  There was outgoing energy in the form of a one-hour massage but no energy received by the provider.   The recipient was a taker but not a giver.


The second way is to make a purchase using “revolving credit”.  Let us assume that the client uses a credit card to pay.  By the way, credit cards are a windfall for the BANKS.  They win on both sides of the equation.  You, as the business owner, must pay the bank a fee for each transaction.  So you really don’t get the full value for the massage you gave.  On the customer side, they may not pay that $75 bill right away.  If they are lucky and have very good credit, they may only be paying 8.99% interest on that $75.  If they let the balance ride for one month, it could cost them an additional 56¢.


Now I know that does not sound like much but as the numbers get larger (both the purchase price and the interest rate), the interest starts eating away at you.  Not only does is reduce your net worth but it also begins to deplete your personal energy.  This is another way to stop the flow of money energy.  With our next example, we will raise the stakes.


Let’s assume you want to redecorate your home.  You are willing to spend $10,000 and will use your credit card.  The interest rate on your card is 11.99%.  Your budget allows for a monthly payment of $500.  It will take you 23 months to pay off the balance and the total interest paid would be $1,212.  For the convenience of paying on credit, the cost of your purchased has increased by 12.12% to a total of $11,212.  If you chose to pay it off in 18 months, the monthly payment would be $620.  You would have paid a total of $959 in interest charges, increasing your costs by 9.59%.


I love numbers but I know that not everyone else does. The only way to show you the large and negative impact that debt makes on your net-worth and self-worth is to give you the down and dirty facts and figures.  Here is a chart that may make it easier to follow:


Initial Purchase Interest Rate # Months Payment Amount Total Interest Paid $10,000 11.99% 23 months $500 $  1,212 $10,000 11.99% 18 months $620 $     959



The cost of debt reaches far and deep, both into your wallet and into your psyche.  It drains you emotionally and takes a toll on your health.  You might not realize this in the short term but over the long term it catches up with you.  You have heard the term “debtor’s prison”.  Being in debt imprisons us, even if we are not aware of the damage it has done.  Just like a garbage disposal that gets clogged up over time; it eventually stops working and may even burn out the motor.  Behind the scenes, all that bad garbage was slowing the flow of water in the system.


Debt stops the flow of money in the your personal economic system.  It builds up to the point where you cannot financially function any longer.  You can’t keep up with everyday expenses because of the increasing interest costs that you face.  Debt is a monster when not kept in check.

Excerpt from my forthcoming book Motivating Money Secrets



Image courtesy of Salvatore Vuono / FreeDigitalPhotos.net

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