Think about what bills you need to pay this month. Do you have a mortgage? Do you need to pay for your car, your credit card, the telephone bill, buy food? What about electricity? And don’t forget the taxes!
You have temporary ownership over this money
Think about the money you need to pay for your debts. Do you wait until the payment due date to find out how you will get the cash to pay? Or do you use a system that helps you put aside part of your income in time to pay for bills before they are due? The money you need to fulfill your obligations must be readily available when the time comes to pay.
You have bills because you have entered into a dual promise: you gain access to something in exchange for a payment. The whole system works because others accept your promise to pay. They, in turn, can then fulfill their promises to make payments: to their employees, their suppliers, and even the government.
This system of promises for payments is based on the clear expectation that the lender — or supplier of money — doesn’t expect any benefits other than a payment for access to capital, and the debtor – or demander of money — doesn’t expect to share any benefits other than a payment for accepting capital (a benefit evaluated in terms of interest).
I will leave those who, for whatever reason, do not pay their debts, and instead focus on the debt mindset.
Being a debtor means that: someone believed in you enough to lend you some money; you used that money to get some benefits; and you pay interest for having access to that money. The only reason such a system works is because the risk of not fulfilling promises to each other is assumed to be very low. Timely payment is expected and neither party should take unfair advantage of each other.
This is the Debt Mindset. You can’t dispose of your money at will if you have debts to pay. You must put aside the money to cover expected payments even if the money is available to you. Although you might have money available, if you have debts, the perception that it is money you owe makes you feel that you have limited ownership over the money needed to pay for your obligations.
You will not use the money needed to pay an obligation if you are not certain that money needed to pay your debts will be readily available when you need to use it for such payment. Because of this relative certainty, debt is a low cost way of funding assets. It is predictable, we know how much we owe, when payment is due, how much payment is expected and what is the cost of having access to such capital.
Keep in mind that lenders receive no upside from a borrower’s better-than-expected results.
Types of debt funding: loans, receivables, employees’ salaries, credit cards, line of credits.