Can you explain like I’m five, what is the national debt, how does it exist, where does the money come from or go?
Do we just pay monthly on it, because God knows if I was to not pay on my debt, someone would hold me accountable….
Thanks.
In: Economics
Simple answer: it’s better to spend someone else’s money than it is to spend your own.
Say you want to buy a car for $10,000 (this value is purely to make the math easy) and you have the money to buy it outright. You have two choices:
1. Buy the car in cash.
2. Take a loan to pay for the car.
If you take choice number one, you have the car and are out $10,000.
If you take choice number two, you have a monthly payment, but you have the car and the $10,000.
While it may not seem like it, in most cases, number 2 is the better choice. Here’s why:
Loan interest rates are often less than investment returns. Say your car loan has an 8% interest rate. On a 36 month loan you’ll owe $1,281.09.
A standard S&P500 mutual fund will return on average 10% year over year. So that $10,000 you didn’t spend on the car will likely earn $3,310.00.
Meaning, by taking on debt when you don’t have too, you can make the purchase you need while keeping cash on hand.
That cash on hand pays for the interest on the loan. And having more money or assets means banks will charge you lower interest rates.
Governments and corporations do this on much larger scales every day.
Latest Answers