Debt

When I was young, my mother would loan me a few dollars here and there to buy a toy. It was agreed that I would pay her back when I raided my piggy bank upon arriving home. I always thought she was simply being nice by loaning me the money; I never realized that she was also teaching me a valuable lesson about the world of finance.

Now, looking back, I know that the simple introduction to lending became invaluable as I entered the adult world of personal finance. I learned from my mother's teaching tactic that money loaned is always expected to be paid back.

We're all trying to pay off debt. It's often a part of life that we cannot avoid. But is it so terrible to have debt? Should we avoid all loans and credit cards? Should we pay cash for everything, even those huge purchases that could take ten or twenty years to save for? Not necessarily. Let's take a look at the positives and negatives behind our debts.

The Negatives of Debt

From the time I decided to become an attorney, my brain was always wrapped around the future.  Everything in life was set to mesh well with getting into and succeeding at law school.  That included finances.

Always careful to only take the exact amount of student aide to cover what my scholarships did not, I knew I didn’t like the idea of all that interest accruing.  I didn’t move out, I chose to stay living at home, where I could study, work, and not have to pay rent (plus I like my parents a lot, and staying wasn’t nearly the drag for me as others seemed to think it was).

My mom really enjoys the televisions show "Leverage." Hedge fund managers on the other hand tend to enjoy the financial type of leverage. You've probably heard of terms like "Leveraged Buyouts" on TV, but most of us haven't really though about what leverage means in that context. So, when talking about finance, what is leverage and is it good?

Leveraging Things

There was never a doubt in my mind that I would go to college. My mom drilled it into my head so much that I was a little flabbergasted by friends who decided to forego the undergraduate experience. Why would anyone decide to skip college? I thought a university education was the only way to get ahead.

Now, older (and wiser? — that’s still up for debate), I see that many of the friends who decided not to attend college don't seem to have paid much of a price for their decision. Their life looks awfully similar to mine, and they don’t earn a lick less than I do.

If you have a child or know any little rugrats, you probably have had some quality, first-hand demos on what it's like to be stubborn.  You know what I'm talking about.  Mom gives a command ("You have to eat one spoonful of peas or it's no dessert for you, little miss!"), and the child who was so angelic all of three minutes ago gets that don't-want-to-can't-make-me glint in her eye and hunkers down for a full-on display that is the very epitome of being hard-headed. 

When I bring up finances with my girlfriends, the first response is usually something like, “Yes, I know. I need to get out of debt.” Sometimes they start complaining about student loans crushing them, and sometimes it's credit cards. Regardless, the outcome is always the same: They think that being debt free is the definition of being financially fit.

We instinctively know what assets and liabilities are, but defining them precisely can help us make better financial decisions. We've looked at assets already, so let's take a look at liabilities.

A liability is a financial term for an obligation to pay something in the future, which typically takes the all-too-familiar form of debt. Anything that you are required to repay at some point becomes a financial liability, including these examples: