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Managing debt by expanding your assets

Previous articles have discussed various aspects of debt management, including changing one’s approach to debt. Those changes can included reducing the total amount of debt, reducing the number of debts, looking at different financing options, and understanding the difference between a positive debt that leads to long term positive financial results, and negative debt that only produces expensed and creates no benefits.

One of the golden rules of debt is related to the last distinction of a positive or a negative debt. A positive debt incudes debt that is finances an asset that produces income that exceeds the costs of debt service and the other costs associated with that asset. An investment in an apartment building that produces a positive cash flow each month is an example of a positive debt.

Another kind of positive debt would include an educational loan that allows someone to find employment that produces a higher income, even after taking the educational debt payment into account. These very same debts could become a negative debt if the investment has a negative cash flow or if the educational loan doesn’t lead to a job or a pay raise.

While managing or reducing debt can be a primary financial goal, sustainable financial stability is much more likely to happen when you have assets working for you. Your assets can range from cash in a savings account or other low-risk paper asset, or a business or real estate investment that provides a positive cash flow every month.

If you don’t have any assets at all, it is probably smartest to start with a low risk asset like a savings account or precious metals. If you are going to use some kind of paper asset, it may be best to put it into an account that is not easily accessed to keep you from being tempted to spend it quickly.

Precious metals may fit into this kind of strategy, since you can’t just take a silver bar or a gold coin 1 oz gold american eagle to the store and use it like a common currency. You have to first take it to a coin dealer and exchange it for regular money before you can spend it. Gold and silver have an additional advantage as it can be used as a hedge against currency fluctuations and inflation.

Even if your debts are far larger than your assets, having even a tiny amount of assets to your name could do wonders to make you feel better about your financial situation and your prospects for the future.

Do you know your cash flow from your capital gains?

When it comes to investing, words and definitions matter. If you don’t understand the question in the title of this article, then you might be easily fooled by a fast talking financial salesperson, or you may pass up an outstanding opportunity because of your lack of knowledge. If you are confused by the terms in the article, stick around, by the end of this article, you will have a good idea of the difference between cash flow type investment and a capital gain type investment.

The basic definitions are simple enough:

  • Capital Gains – If you invest for capital gains, your goal is to sell something for more than you bought it. In order to receive the gain, you typically no longer own or control the asset. Stocks that don’t produce dividends are a classic capital gains investment. Another type would be investing in unimproved land.
  • Cash Flow – If you are a cash flow investor, your goal is to receive a series of cash payments from your investment, and you typically still own or control the asset. Long term ownership of dividend producing stock fits this model, as does investing in rental real estate.
  • This is a very, very simplified description of the different between cash flow and capital gain investing, and you can read any number of books that go into the details. Depending on what kind of investing you are doing, you probably have to have a completely different approach depending on which kind you are doing.

    The key to remember is that any type of investment vehicle may include both cash flow and capital gains. Whether one type or another is best for you depends on the investment and a variety of other factors, including your near term and long term needs for a return on your investment.

    For example, if you are investing in a company that specializes in advertising on radio, if you purchased the company and intend to keep it for several decades, you may want to do so only if it is a cash flow type investment so that you can pay the employees and other overhead costs. If you think that radio will be a dead medium in five years, you may want to take a capital gains approach and position to sell the company quickly, and profitably.