In Debt and Loving it. Sorry Mom.

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There comes a time in every immigrant alien's life where he/she notices some fundamental values/principles that they were brought up on - are questioned, deliberated on, shot down and eventually changed.

The concept of debt is one that I shattered very recently. Growing up - I remember Dad's notion that "Loans and Debts are bad". Well yea - he was an extremely smart and hardworking engineer but would not really know a million dollar business plan if it landed on his lap while mom on the other hand taught me the notion of "Save 25% of income for the rainy day." (I know - aint she the quantitative one). And trust me Chennai, India is no Seattle, WA. Remember those rain-dances in every indian movie you saw - well we dint exactly dance - but there defnitely was always a sigh of relief following every rainfall. (unless it happens on the 5th day of a cricket test which India would be winning against Australia or some fancy team like that).

Fast Forward to 2005 and I am in Debt for my MBA, Car, House ..... and to say the least - it is quite unsettling. Nothing to worry about - since its normal, and in control  but disconcerting to a new first-time home owner nonetheless. Have a look at the US Debt clock  and what I saw in Microsoft Money 2006 (which shipped this week and is awesome!) :

  • About 43% of American families spend more than they earn each year.
  • Average households carry some $8,000 in credit card debt.
  • Personal bankruptcies have doubled in the past decade.

Put that in context with the fact old adage at home of "save 25% of income for the rainy day" and you see the issue.

Ofcourse Mom never understood the concept of Leverage (The amount of debt used to finance one's assets. Since significantly more debt than equity is considered to be highly leveraged - albeit at higher risk should the new investment go against you.). But then she never went to business school either where it was ingrained that - Most companies use debt to finance operations. By doing so a company increases its leverage because it can invest in business operations without increasing its equity. For example if a company formed with an investment of $5 million from investors, the equity in the company is $5 million and this is the money it uses to operate. If the company uses debt financing by borrowing $20 million, the company now has $25 million to invest in business operations, and more opportunity to increase value for shareholders.

One way or another - I guess I did decide to side by the BSchool thinking than mom's cant-say-its-wrong-nor-optimal thinking.

So Sorry Mom. I'm now in debt - and Loving it.