The Wise Investor
that was for personal items and purchases. When we spoke
about personal money management, a loan was simply a
substitute for saving up for a purchase.
In your personal purchases, you should save up wherever
possible. However, when it comes to business and
investment, the situation is different. If you borrow money to
purchase an asset, and the asset produces a greater income
that the loan interest, then you have made a profit overall.
Many business and investment transactions are not
practical without the use of borrowed money.
In the case of the blacksmith, he borrowed money to buy
a larger bellows. Because the income from using the bellows
was greater than the loan interest, he was making a larger
profit in total.
In fact, the more you borrow, and the larger the asset,
the greater your profit will be. Of course there are
limitations and problems with this approach, which we will
discuss later. Overall, however, I wish to illustrate that
borrowing money for business and investment is quite
normal and healthy, and can increase your profits."
John paused for a few deep breaths.
"Now, the baker. The baker employed staff, who
produced an income for the bakery. As long as the income
they produced was greater than their wages, the baker made
a larger profit from the business. Of course, he still needed
equipment for them to use, so there was a limit to how many
people he could employ, but within limits, the more people he
employed the greater his profit would be.
Kate, if you are simply investing your own money, and
not operating a business, you will not need to deal with
employees. However, it is still very useful to understand how
this system operates.
The use of employees to make a profit is so fundamental
to our economic system, that you could not hope to see the
complete picture without it,.