The news is filled with horror stories about debt. National debt, provincial debt, personal debt – apparently we are drowning in it. In part, this is a hangover from the 2008 financial crisis. Millions of people found themselves with houses that were ‘underwater’, i.e., worth considerably less than the mortgages they held. Some held on; some walked away. A few banks went under. A few bankers did the honourable thing and jumped out of windows; the rest awarded themselves additional bonuses and pretended nothing had happened.
Debt can be a bad thing. Especially if you have ethics. My father, when his grocery store went under, paid off every dime he owed. It took a lot of years and a great deal of discipline but he did it. It wouldn’t have been a problem if the people who owed him even more had the same degree of honesty. They didn’t – though some paid their debts to my mother when my dad died. Better late than never, I guess.
Too much debt to pay for short term gain can also damage countries. Look where cheap money got Greece. A few other countries are in a similar boat. But they will survive if money stays cheap or if the economy starts to grow. If you owe $10,000 when your income is $20000, you have a problem. Grow your income to $70000 and keep the debt the same and it all seems more manageable. The same thing goes for countries.
Debt can be a useful tool to get something you want or need when you can’t pay cash. Most people, for example, would never own a car or a house if they couldn’t borrow money. But here’s the trick – you shouldn’t buy thing s on debt if they ever lose so much value that they are worth less than the amount you owe. The idea of ‘under water’ applies equally to cars or running shoes and iPods.
Governments can – and sometimes should — go into debt to build infrastructure or to spend their way out of recession. Even conservatives can be converted to that idea (especially if it is the only way to stay in power).
My own journey with debt has been rather Keynesian itself. When my income was low, I spent money to maintain a lifestyle and, more importantly, improve my chances at higher income. When my income rose, I paid off my debts or reduced them to manageable levels. But sometimes you simply have to wait rather than immediately gratifying your desires. Sometimes that is really hard.
But it can be done. Though sometimes you have to trick yourself. For example when I was 45 I had no accumulated pension – so I got a job that would give me one. And I bought back all my pensionable years from my previous career. As a result I had less money to spend each month with the knowledge I would have some money to spend when I was old.
My mortgage works the same way. I couldn’t care less if I own property – despite real estate agent’’s claims — the financial benefits of owning is no greater than renting . If you are disciplined. Which I am not. Having a mortgage is a form of enforced savings so if I sell my condo and go back to renting I’ll have a pile of cash to increase my income with.
It’s all about how you think.
And that’s ten minutes.