Credit Card Spending is Like Buying Investments Based on Speculation
Tuesday, July 12, 2011 at 8:35AM In a recent article on Yahoo Finance, it was shown that 26 percent of the disposable income in Brazil was being used to service debt. In comparison, the United States, a country that is widely known as big consumption spenders, only spends 16 percent of itsdisposable income on debt.
What this is, is an example of how someone can borrow money to make it look like they are doing well in hopes of their income increasing at a faster rate than their spending… My question is: How is this any different than buying real estate and stocks based on pure growth and speculation as opposed to cash flow? Well, the answer is: It isn't.
The theory behind buying in high-growth areas of the country like Vegas, L.A., NYC, and other such hot spots in the real estate world is that the revenue will increase at a much faster pace than the expenses, allowing an owner to lose a little cash flow to start, but over the long run it will be OK because the future money will catch up. Well, unfortunately, when things start to sour, that is when those who are borrowing to pay their debts will be caught.
It is the same as with the economies in many developed nations like the United States and Brazil. People have overextended themselves on credit card (and national debt) saying that their growth in their jobs and income will catch up and they will be able to pay off their debts. Unfortunately, when a downturn hits like we are having now, it is just a matter of time before the tough lessons will be learned.
Buy real estate and investments based on today's income and revenues, and spend in your personal life based on today's income. That's the surest way to avoid financial disaster. It's not a guarantee, but it sure is better than the alternative.
Reader Comments (2)
Real estate world is world where the revenue increases at a much faster pace than the expenses, allowing an owner to lose a little cash flow to start, but over the long run it will be OK because the future money will catch up.
Thank you for the comment. Unfortunately this doesnt always happen and that is the difference between speculation and investment which is actually another article I wrote.
Rents over the long run should go up with inflation but short term economic issues could hurt you significantly if you are basing your purchase on rents going up to pay your bills and mortgage. It is too risky a proposition early on for most