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Not All Debt are Equal

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Debt is bad. This is what I was told when I grew up in China. I think this is most of my parents generation feel about debt, I am talking about average working people, not the entreprenurs such as Lu Guanqiu, the founder of Zhejiang Wanxiang Group. So when I told my parents I bought a house and got a 15 years loan, their first response was “you will be (my current age+15) years old when you pay off the house”.

We borrow for different reasons. Some are good, some are bad. Buying a house is a good one in general, because it usually has some tax benifits (mortgage interest deduction). Also if we could borrow at a lower rate, invest it and earn at a higher rate, that is also good. We should note one thing though: the cash flow issue, we should have enough regular income to cover the monthly payments for house, food, gas and credit cards, etc.

Business also borrows, sometimes they borrow a lot. Some are good, some are bad. If a business use the money wisely, invest in people, product and generate a better return (than the interest), we know it’s good. On the other hand, if a business borrows the money to expand CEO’s suite, buy back the stocks (because of excessive stock options grant) to boost stock prices temporarily, we know that’s not good debt.   

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