Let’s talk about Debt and Income
Most people have experienced, will experience, or are currently experiencing debt in their lives. Debt is a tool. So let’s talk about it.
Debt is the promise of repayment of something of value, usually with interest, over a specific period.
I like to think of it as “negative income”. It makes it a bit more tangible (albeit a bit more scary). Rightfully so, your debt directly subtracts from your income. So it is safe to reason that one of the easiest ways to reduce your debt, besides not accruing any more debt of course, is to grow your income.
However, there are multiple types of income and many sub-types of income streams within the types of income. Let’s talk about those first.
Passive Income vs. Active Income
Active Income: Many people are familiar with this type. This is also usually called “earned income” or income by action, usually by the trading of time for a wage. A yearly salary income from a job is included in this form of income.
Passive Income: This is the type of income that is generated without action and is the income most people do not consider as it is less tangible and harder to see or establish. A few examples include:
- Investments with compounding interest
- Dividend payments
- Book royalties
- Patents
- Previous content creation (e.g. art prints, videos, informative lessons)
- Business income
- Real estate rentals
- Advertisement
These sources are not definitively tied directly to a salary or a time commitment and can be set up to passively generate income even without the person’s direct input at all times. A “set it up and generate money while you sleep”. Not a bad way to think about it, but of course it is not as simple as it sounds.
Now that we’ve talked about income, let’s talk about Debts.
I affectionately (but aggressively) term these as:
“Wills, Workings, and Wants”
Financial Goals or “Wills”
These goals essentially are the long term, higher expense purchases, with either high return on investment for the money spent, or create high value skills, or are stress reducers for the person to allow them more space to do the things they love. Of course these choices vary between people.
Some common examples:
- Higher education
- Home
- Children
- Car
Current financial plan or “Workings”
This includes personal savings, current investment income through growth or dividends, liquid assets. Compared against the outflow of cash earned through any income stream.
Generating a passive income stream, or better yet multiple small ones, can be a sound financial planning strategy and give room in the “workings” to influence your “wills” and “wants”.
Expenses: Using your Active and Passive incomes – paying Debts in your “Wills” and “Workings” allows you not only to increase your potential passive income (and therefore increasing the money available to you overall for budgeting) but also allows you some choices for “Wants”.
This is very much so a “incomes versus expenses” and is one of the reasons why knowing your current budget is so important! It’s why the financial plan post recommends trending your incomes and expenses for a month at minimum to see what you are actually spending and where.
Impulse or desired purchases or “Wants”
Wants are the things you earn when you complete your Wills and Workings.
This category includes:
- Vacations
- Hobbies
- Extra vehicles
These purchases, though wants, should only be paid for in cash. This prevents the use of credit cards, or debt generation, for the sake of Wants. If you are unable to pay for something in cash, do not use a credit card to pay for it. A credit card is not cash, it is debt and debt is negative income working against your “Wills” and “Workings”.
Debt is a tool. This is a very important topic which tends to not be discussed openly, so let’s talk about it!
Debt is a tool.
Debt is not inherently bad.
The usage of a tool is related to the user of the tool. When we are better taught how to use a tool, the usage of the tool improves. We cannot expect the usage of debt to be appropriate immediately, just the same way we cannot expect a novice to use a hammer correctly without being taught how to use it. It is up to us to learn how to leverage debt as a tool in the best way possible for ourselves.
Debt takes work, time, and energy.
There is an incredible emotional toll on maintaining and paying debt appropriately. The best way to not have to spend that emotional toll is to not have debt. Prioritize choosing when to use debt wisely to conserve more of your precious time and energy.
Debt can liberating when your investment is wise
Debt is a choice, but our choices are our power. Not to wax philosophical for a moment, but if the choice of debt gives us more positive choices in the future, and we foresee being able to manage the psychological and financial repercussions of the debt, we see the toll of using this tool for the power it can leverage.
Debt is a tool.
Use debt wisely; Pay yourself first.
One of the reasons I started this blog was because of my own personal experience with debt.
I had credit cards that I used poorly, but I managed to pay them off and learned from my mistakes. I still have student loans. As an RN with a masters degree, I accrued a lot of debt to accomplish school. I’m still paying them, but I would not have been able to be where I am today if I did not go to school. If there is one thing I wish for this blog to do, it’s to help someone learn faster what it took me years to learn on my own.
Hopefully this was helpful to read! I really am passionate about paying debt off from my own personal journey. Be smart and make informed choices everyone! You’ve got this!
From my mind to yours!
~Jay
I enjoy sharing what I have learned through my own personal finance journey!
