Taking Debt and Overspending Is Good

If you know what you’re doing.

I heard Dan Peña explaining a business practice that he followed back in the day. Mr. Peña was spending 125% of his revenue every year, which astonished me.

I have written about entrepreneur mindset before and I have mentioned the lack of risk aversion as a part of it. Even then, I couldn’t think about spending 125% of my revenue every year. That was one of the moments when something I learned expanded my consciousness to new possibilities.

Conventional wisdom says “spend less than what you earn, save the difference, and never take debt except for your home.” I follow that advice and it’s kind of useful for the average person. However, entrepreneurs are a different breed.

Mr. Peña’s justification for spending more than what he earns was to give himself no way out but to perform at his best. Talk about motivation.

When Mr. Peña was spending 125% of his revenue every year, he most probably spends this revenue into businesses that would bring more profits down the road. So, he was probably following an aggressive growth strategy.

The way an entrepreneur overspends and the way a regular person overspends are two different things.

An entrepreneur overspends by investing into businesses and assets that would bring profits in the future. A regular person overspends into liabilities, things that would only depreciate and will not bring any money in the future.

Robert Kiyosaki explains the difference between assets and liabilities brilliantly in his book “Rich Dad, Poor Dad.” Mr. Kiyosaki claims that even your home is a liability, because it doesn’t bring any income, but requires you to spend money.

“Your home is a liability.” Robert Kiyosaki

Taking debt to invest in assets, in your business, and in your career is a risky move. It’s a double edged sword, which works out for some people and doesn’t work for others. For example, think about all the people who are stuck with their student loan debt or lost their savings in the real estate crash.

Summary

Debt is an instrument entrepreneurs use to pursue growth. It requires doing your due diligence for sure. If you take into account the official 2% inflation target in fiat currencies, the governments are actually encouraging people to take on some debt. On top of the inflation argument, having to pay debt to keep your business aloft can be a huge motivation.

Disclaimer

This post is for information purposes only and not intended to be investment or business advice.

Burak Bilgin
Software developer with a Ph.D. and 15 years of experience. I write daily on personal development and life lessons. Sign up to my email newsletter to receive a weekly overview of my latest content on personal development and life lessons.

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