The Importance of Credit on Your Path to Financial Freedom

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Welcome to the 6th Installment of my:

Achieve TRUE Financial Freedom Series

Welcome to my Financial Freedom series. By now, you have read, What Financial Freedom is NOT, and then Financial Freedom & Your Time, then Financial Freedom & Your Money, then Financial Freedom & Opportunity and Why Your Financial Advisor Can’t Help You Achieve Financial Freedom.

I have been a Financial Advisor for nearly six years now and something truly bizarre has occurred to me over the past couple of years, more so, given that the bulk of my clients are financial professionals.

A good number of my clients are:

• Management Accountants,
• CPA’s (Certified Professional Accountants aka Chartered Accountants),
• Investment Bankers,
• Financial Directors,
• CFO’s (Chief Financial Officers)
• and more

Looking at these titles, it is quite easy to see that these individuals have a good idea of how businesses spend their money and use their access to credit.

This may sound basic and simple upon first glance, but an alarming pattern has become apparent to me that I want to share with you today.

How Do Businesses Use Credit?

Businesses have access to credit, and they need it. Very few big businesses, if any, would be as large as they are were it not for credit.

This being said, any big company will not take out debt to pay salaries. The banks would not even give them credit for this purpose. Furthermore, big businesses will not use their access to credit to fund conferences, team building activities, and similar expenditure.

Big businesses will, however, use credit to:

• fund product development,
• expansion,
• the construction of offices,
• gain tax deductions,
• save on funding costs.

Credit, they use, make money and to scale (grow) their businesses.

Now, we can all attest to the fact that businesses by far, are more effective at making money than individuals. For a person such as myself, this is a cause for further study and examination. Said differently, if I want to make a lot of money, I would rather try to learn to do what businesses do than what people do.

How Do People Use Credit?

What do people typically use their credit cards for?:

• Car rentals
• Online purchases
• When you don’t have the money to pay cash for something you want to buy
• Times when you have more month than money

What do people typically use loans for?

• Car repairs
• Home improvements
• Furniture

What do people typically use mortgages for?

• The house they live in

Good Credit Usage

Every business exists primarily to do one thing: make money. The employees that work for these businesses do so for the same reason: make money. This is where the bizarre contrast begins to emerge.

Did you notice a difference between how businesses use their money and access to credit and how the individuals that work for these businesses use their money and access to credit?

Individuals use their access to credit to access today, things they can only afford tomorrow. You can have a debate with yourself as to whether these purchases are needs or wants, but the fact still remains, you cannot afford them and for this reason, you use your access to credit to fund them. This, to me, fits the description of “debt.”

Did you notice that none of the typical examples that I listed above of how individuals use their money, make them money? The cash that they have, they then use to finance this debt.

Businesses, on the other hand, use cash to finance non-income-generating expenses, and use their access to credit to finance expenditure that will make them money. This kind of use of credit is called “leverage.”

“Leverage is using something you don’t own to create something that you will own.”

Nyiko Mongwe

Credit and Financial Freedom

As discussed several times in the course of this guide, you cannot save your way to wealth. To create wealth and Financial Freedom, you need two components:

• Savings
• Leverage

Build up savings so that you don’t have to use credit for debt; this way, you free up your access to credit to be used for leverage and not debt.

Continue to save, so that you have enough money for a down payment when the bank (or your lender) asks you to provide one when they provide you with funding that you will use as leverage.

If you don’t believe me, read this article from Reader’s Digest, What Rich People Never Buy.

This, my friend, is how to set up your finances for Financial Freedom. More tips on how to get you here and what to do when you get here on Deploying Your Money.

Catch the next installment of my Achieve TRUE Financial Freedom Series, Financial Freedom & Your Career.