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Debt: employee vs owner

Anything related to matters of the mind

Johnny boy

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As an employee you have a set income. If you spend $5,000 or $50,000 you still make the same amount.

As a business owner you have a money machine. Money in turns into a certain amount of money out.

Many business owners I have met apply employee mindset finance advice to their businesses. They think frugality is good (which it is), but they also see debt as bad because of interest and risk. If you had a machine that turns $10 into $15 in a couple of months, wouldn’t you borrow as much money as you possibly could to put into that machine? As long as the interest rate on that money would result in a net gain it would be absolutely worth it.

There are three levels of financial intelligence that I’ve seen.

1. idiots who go into debt to buy things when they have a limited income. Sidewalk folks

2. People who think they are smart by only paying cash.Slow lane folks

3. People who want to put everything on credit because maximizing every dime towards their business growth is the most profitable.

My financial decisions seem to closely mirror someone who is a complete idiot. I’ll buy everything I can on credit, make payments, long terms, high interest, etc. and here’s why.

If I have $1,000 and need to buy something, I would much rather pay for it in $50 payments than cash upfront. I don’t even care if that interest ends up being twice the cost of the purchase. That’s because I know I can spend $1,000 on Facebook ads, which add $2,000 a month to my business revenue, which is $24,000 a year in a business that has a 30+% profit margin. So by paying cash, my cost is $7200 minus interest paid by financing my purchase.

With my business, it actually make sense to take something as crazy as a payday loan.

Now, nothing is certain. There is a chance my business idea doesn’t work. There is always risk. The odds of me making that profit margin are not the same as my odds of having to pay back that loan, but the math is still in my favor. Even if it’s only partially likely I make that profit margin, it still makes sense to take as much money as I can.

My whole life I’ve been told to avoid debt. I’ve been finding that it’s the greatest tool for growth. Debt is bad if you’re too stupid to turn a profit with it. If you are smart, debt is a blessing. I just received a 24,000 SBA loan. I’m putting it to work and I’m already seeing great things after just a week or so.

TLDR: Dave Ramsey is for middle class normal people.
 
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YanC

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Debt is neither good nor bad. It's a tool and it's up to you to use it thoughtfully and responsibly.
 

Kid

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I see your point. Can you share a bit what do you spend this loan on?
 

amp0193

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There are three levels of financial intelligence that I’ve seen.

1. idiots who go into debt to buy things when they have a limited income. Sidewalk folks

2. People who think they are smart by only paying cash.Slow lane folks

3. People who want to put everything on credit because maximizing every dime towards their business growth is the most profitable.

4. You fund growth through the profits of the business. Then if sales dry up, your warehouse burns down, your factory ships you defective product, or a pandemic wipes out your business, you aren't on the hook for any debt payments.

5. You grow your business with other people's money by selling equity stakes in the business. You're not on the hook for anything if you go bust.


Debt is a tool as @YanC said. Over-leverage and things could go very bad for you if business takes a turn.
 
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Johnny boy

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I see your point. Can you share a bit what do you spend this loan on?
ads, employees, affordable equipment for the new crew.

$500 in ad spend this last week or so got me $2,000 a month in added revenue. That $500 brings in $7,000+ of net profit for one year. We should be pacing $120,000+ of net profit within a few months.
 

minivanman

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4. You fund growth through the profits of the business. Then if sales dry up, your warehouse burns down, your factory ships you defective product, or a pandemic wipes out your business, you aren't on the hook for any debt payments.

5. You grow your business with other people's money by selling equity stakes in the business. You're not on the hook for anything if you go bust.


Debt is a tool as @YanC said. Over-leverage and things could go very bad for you if business takes a turn.


I was #4. Never had debt or a credit score that I know of. I put every penny back in to the business and it didn't take long at all for it to really grow. It took me a year to see, because at the time, I had the slow lane mind set and never thought about making lots of money. Once I figured that out, man it went quick! And that is when my mind turned in to a calculator.....
 

samlarsonns

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As an employee you have a set income. If you spend $5,000 or $50,000 you still make the same amount.

As a business owner you have a money machine. Money in turns into a certain amount of money out.

Many business owners I have met apply employee mindset finance advice to their businesses. They think frugality is good (which it is), but they also see debt as bad because of interest and risk. If you had a machine that turns $10 into $15 in a couple of months, wouldn’t you borrow as much money as you possibly could to put into that machine? As long as the interest rate on that money would result in a net gain it would be absolutely worth it.

There are three levels of financial intelligence that I’ve seen.

1. idiots who go into debt to buy things when they have a limited income. Sidewalk folks

2. People who think they are smart by only paying cash.Slow lane folks

3. People who want to put everything on credit because maximizing every dime towards their business growth is the most profitable.

My financial decisions seem to closely mirror someone who is a complete idiot. I’ll buy everything I can on credit, make payments, long terms, high interest, etc. and here’s why.

If I have $1,000 and need to buy something, I would much rather pay for it in $50 payments than cash upfront. I don’t even care if that interest ends up being twice the cost of the purchase. Here is the link to the info on how funds work That’s because I know I can spend $1,000 on Facebook ads, which add $2,000 a month to my business revenue, which is $24,000 a year in a business that has a 30+% profit margin. So by paying cash, my cost is $7200 minus interest paid by financing my purchase.

With my business, it actually make sense to take something as crazy as a payday loan.

Now, nothing is certain. There is a chance my business idea doesn’t work. There is always risk. The odds of me making that profit margin are not the same as my odds of having to pay back that loan, but the math is still in my favor. Even if it’s only partially likely I make that profit margin, it still makes sense to take as much money as I can.

My whole life I’ve been told to avoid debt. I’ve been finding that it’s the greatest tool for growth. Debt is bad if you’re too stupid to turn a profit with it. If you are smart, debt is a blessing. I just received a 24,000 SBA loan. I’m putting it to work and I’m already seeing great things after just a week or so.

TLDR: Dave Ramsey is for middle class normal people.
Debt is not something you should be afraid of. There is a health debt and the unhealthy one

For example, if you are taking credit or a loan ( I do not think that payday loan is applied in this particular situation but if the author whats it goes that way I'll stick to it ) the healthy one is where you have already established steady income, and you need additional money to grow your agenda/business

The unhealthy one, on the other hand, is where your business is in decline, you are losing money and trying to get a loan to plug in some holes in the budget. This strategy usually leads to a 90% chance of failure, still, not a 100% but taking that risk is really dangerous.

If you just planning to open your business you should have enough money to keep it running for at least half a year without any profit from it ( usually specialists recommend a year, depending on the business ).

There are miracle stories right and left about people starting to make money right on the verge of going bankrupt ( for example tesla was about to go down in a week and Elon managed to secure funding to keep it running and it's now evaluating for more than every other automotive company in top 5 list combined ) but we never knew how much stories of failure there is for one that got lucky.
 
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Last edited:
G

Guest-5ty5s4

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This is very true. Debt is a normal part of the process. The amount required depends on you, your business, your unique situation.

But like you said, nobody should be scared of debt. It's all about financial intelligence and applying the correct approach in the specific situation.

If you have a business that makes $1,000,000 and you can buy a piece of equipment on loan for $200,000 but it doubles the profit of your business, it's going to be a pretty wise decision to do it (depending on how reliable the industry is, if the customers could all stop buying tomorrow, etc)

But yes, leverage is the key to growing bigger and being more than just a single individual working a job (or a business that is basically a job).
 

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