WHY IS IT THAT ONLY POOR PEOPLE’S LIVES GET DEVASTATED BECAUSE OF DEBT, WHILE RICH PEOPLE HAVING MUCH HIGHER DEBTS ARE IN A COMPARATIVELY GOOD STATE?
Jan
15
2019
Peter Answers
Poor people borrow to buy consumer goods, or in some cases to pay for medical emergencies, funerals and such. Overall, their borrowed money gains them no return on investment … It is immediately spent and gone forever —while their debt remains and grows. And grows.
If the typical “poor person’s” debt is to be repaid, the funds must come (usually) from job earnings . If they are already earning only a bare subsistence income, the debts just keeps growing. Like cancer.
Another factor is that the poor typically borrow from money-lenders or on their credit cards. The huge rate of interest they are charged often STARTS at 30% a year. Then add to that, late charges and interest on the interest. It is no surprise that such debts grow until they are unsustainable and out of control. Result? Foreclosures, seized collateral, bankruptcy, more borrowing, and at worst, cement shoes (see google for definition) or even suicide.
Wealthy people go bust too, sometimes. But more typically, they borrow at very low interest (these days 2 or 3% a year) to finance business deals or purchase rental property. Education is also a good investment. On sensible investments, the Return On Investment (ROI) is always going to be much higher than the interest they are paying.
For example, you borrow $100,000 at 3% a year. To pay the interest and also amortize (pay off the principal of the loan) you’d need say $5,000 a year cash flow from your business or rental property. This pays the interest and also (over the years) pays off the loan. If your $100,000 property or business is going up in value at the usual inflation rate of 6% a year; if it is earning, say 11%, in rents or income, the wealthy person is 12% net ahead every year or has around $1,000 per month in extra money to spend or invest. [The total ROI is 17% the payments required = 5%] And that is why the rich get richer: They borrow money only using it as a tool to make more money. The poor typically borrow for bad, loss producing “investments” (like cars, rent or homes they cannot afford), or for vacations, weddings, funerals, cosmetic surgery, expensive toys.
All of these things give no return on investment. That is why the poor get poorer. 99% of people don’t think before they borrow. The remaining 1% (actually more like the 15% that is the middle & upper classes) avoid consumer debt entirely and/or use borrowed low interest money (usually mortgages) as capital for sensible investments and making deals.
Category: Peter Answers
By P.T.
January 15, 2019
Source : http://www.petertaradash.com/why-is-it- ... ood-state/