Mark Cuban is a self-made billionaire. He is widely known as the dynamic owner of the NBA team, the Dallas Mavericks which won an NBA championship in 2011. He is also one of the hosts of the popular reality TV show “Shark Tank”. In “Shark Tank”, budding entrepreneurs are given an opportunity to pitch their business to Cuban in the hope of landing much-needed funding assistance.
As successful as Cuban is, he has had his share of business failures – and he is not shy to talk about it. For Cuban, you can learn more from someone’s failures than from someone’s successes. Like most first-time entrepreneurs, Cuban looked toward acquiring debt as the quick fix solution to funding shortfalls. He learned early on that acquiring debt leads to more problems in the long-term.
However, Cuban has an interesting take on debt. He views it as an investment. Here’s a quote from Cuban regarding paying off debt as a solid investment:
“The reason for that is whatever interest you have – it might be a student loan with a 7% interest – if you pay off that loan, you’re making 7%. And so, that is your immediate return which is a lot safer than trying to pick a stock, or trying to pick a real estate or whatever it may be.”
What is the rationale behind Cuban’s logic?
Debt is like an investment – only in reverse. The 7% interest that you are charged is similar to the rate of return on your investments.
Think about it this way. When you deposit in a bank; whether in a savings account, time deposit, and any other interest-yielding placement, you are essentially lending to the bank which in turn will lend your money to others in exchange for interest.
So while the bank may credit your account with a 3% interest, the bank would be lending your money to others at a rate of 7% or higher.
When you settle your debt, you can breathe easier. You will be able to focus on creating wealth. Debt payments will eat away your income. If the lender increases the rate of interest, the total amount payable to the loan will be higher. Over time loan payments will eat up your savings.
Banks will incorporate a repayment clause on the lending agreement. This means the interest charged on your loan will have an automatic increase the following year.
If you have the money to settle the obligation in full, by all means, pay it off. This is why before signing on the loan agreement, make sure there is a condition that allows you to pre-terminate the loan without incurring charges.
Keep in mind that debt may appear like a short term solution but it carries the risk of having long term repercussions. The best case scenario is to find ways to improve liquidity without having to apply for a loan. For example, take an extra job, find a side line project, accept freelance work, or sell some assets.
However, if you find yourself in debt, focus on paying it off as soon as possible.