MasterPo says: This blog is about topics and issues that are of importance to me. I am not one of the countless blogging lemmings that are tripping over each other scurrying down the hill and off the cliff of blogging oblivion trying to write the greatest blog on the latest topic de'jour. Your comments are welcome.

February 28, 2010

The Main Event: Debt vs. Cash Flow

Ladies and Gentlemen.

In this corner weighing in at a crushing amount we have DEBIT!

And in the other corner standing out urgently we have CASH FLOW!

Come out swinging!

Ok, enough with the dramatics.

There are [too] many websites and blogs that speak only of dealing with your personal debt (and by "personal debt" MasterPo means credit cards, mortgage, auto loan, etc). So this won't be yet another get-out-of-debt article.

But what is important to remember is the balance between debt and cash flow.

Many pundits and experts (often self-proclaimed) espouse that you should pay off your debt as quickly as you can; That you should pour every unspent dime into paying down your debt.

Conceptually, it's not a bad idea. Especially the very high rate debts of credit cards. Not much argument can be made there.

But you still need cash to live on.

You need to buy food, clothes, transportation, energy, medicine and so on. And you should have some kind of rainy day fund too.

Yet in the middle is reality of your cash flow. There just isn't enough money to service your debt to the max and still have a positive cash flow for daily life and savings.

MasterPo can't tell you how much to allocate to debt vs. living. There is no magic formula or equation to figure that out. But the reality of life is that just can't put every extra dollar into debt service. You may (will) end up paying more interest in the longer run but you need cash now.

One further point to add in to this topic:

Paying off your debt is not an "investment"!

Pundit/experts will tell you that paying off high interest debt gives you the best return you can.


While you are reducing your interest cost which will give you more money in the longer run, it is not the same as making an "investment". The reason is simple:

If you put $1 towards your debt you have reduced your debt by that dollar and cut some amount of future interest you owe (regardless of how small the amount is). But that dollar is gone for good. You can never ever get that dollar back without re-incurring more debt! And there is no return from that $1 you can spend. You do reduce your overall debt such that in the future you won't have to spend any more on the debt but that's a future time which involved time-value risk and economic uncertainty risk.

By contrast, putting $1 into an investment gives you the investment plus some return that you can spend. So when tomorrow comes you could get back your $1 and spend it (presuming a low risk or risky-free investment, but even a high risk investment realistically has little chance of going totally to zero-value in the short run at least).

How much you put towards paying your debt is up to you. Each person has a comfort zone for these things. And there is the reality of daily life and opportunity risk.

Think carefully.

As the Chairman says: Let the battle begin!

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