When Debts Are Fun, and When They Aren’t

“Some debts are fun when you are acquiring them. But none are fun when you set about retiring them.” – Ogden Nash

I don’t mean to beat a dead horse to death, Vera. But I know you’re going to be bombarded with people, banks, credit card companies, stores and others encouraging you to borrow. And making it really easy for you to borrow.

Why wait when you can have it now? And you can have it all!

That’s the message. What you’ll never hear, however, is anything about the pain of paying it back (retiring the debt). And of not having enough savings to become financially independent and enjoying the freedom that comes from that.

Borrowing has come to be the American way. I’m not really sure why. But I am sure that excessive debt — and, in particular, the incurrence of huge amounts of unproductive debt — have caused all kinds of problems for people, companies, and local and state governments.

Yet we seem never to tire of debt. In fact, we borrow even more.

Oh, well, I suppose you’ll figure out what’s best for you. Just try to remember Mr. Nash’s point when you’re considering whether to get into debt: there is nothing fun about repaying loans.

That’s not to say that all debt is bad. Indeed, debt for productive uses can be good. Debt that yields a robust debt-income stream can be good.

But much of the debt incurred doesn’t. Paying that back will hurt the most.

There Are Only Three Good Reasons to Borrow

America has fallen in love with debt. We borrow for everything. And, frequently, too much.

As a nation, we’re so overextended on debt that there’s a real debate on whether we’ll ever be able to climb out of the financial hole we’ve dug for ourselves, that is, without fist going through another depression or financial collapse with large write-offs (losses taken by debt holders). But even if we avoid those catastrophes, the debt will hang around our necks, depressing economic growth.

We’ve mortgaged our future. We’ve pulled future spending forward with little to no regard for the impact on tomorrow.

On an individual basis, often this means we’ve heaped a load of stress on our lives. Unnecessarily. Sometimes it results in bankruptcy. Sometimes, in depression or anxiety. Sometimes, in failed marriages or other ruptured family or work relationships. Often, it means a delay in retirement (less financial freedom). Rarely are there no adverse consequences.

Having lived nearly a lifetime, I’ve concluded there are only three good reasons to borrow. They are:

  1. to buy real estate
  2. to pay for valuable education or training
  3. to finance an ongoing profitable business

If I were given the opportunity to live life over, I’d never borrow to buy a car or to pay for a vacation or any other discretionary expense. Or borrow to buy stock (on margin), which I’ve never done. And I’d certainly never carry a balance on any credit card.

As for the three permissible reasons listed above, it would be important not to overpay.

That means not buying real estate at inflated values (such as a house in the mid-00s) or beyond what could be repaid with a margin of safety (not more house than I need or could afford).

And not overpaying for a college degree (such as borrowing to attend a mediocre school or to obtain a degree with little or no economic value).

Purpose and amount are key. Proportionality. Margin of safety.

One nice thing about being older is being debt-free. It’s actually quite liberating. I wonder why I didn’t do it sooner.

Next time, I will.

Generational Theft

In my lifetime, we have witnessed the greatest intergenerational transfer of wealth ever seen. Seniors have benefited. Our youth have taken it on the chin.

Oddly, even so-called conservatives don’t seem to mind this massive redistribution of wealth. It enjoys broad support. The reasons are obvious; 1) older people vote at a higher rate than young people and 2) people (both voters and their elected representatives) tend to vote their self interest.

Hence, at least thus far, the Boomers and their parents’ generation are doing just fine, the recipients of massive transfers; the youth are massively in debt and on the hook for trillions of obligations owed to what I call the dying generations.

I’m not going to get into the numbers here. If you want to catch a glimpse of them, you can watch this video of renowned investor Stanley Druckenmiller (a former Pittsburgher so he must know what he’s talking about!).

But you shouldn’t have to be convinced. Just think for a moment of the massive transfers that take place in the form of Social Security (people take out far more than they pay in), Medicare, special benefits extended to seniors by state and local governments (e.g., real estate tax breaks) and the less visible countless tax breaks and subsidies that inured mainly to the benefit of the Boomer and their parents’ generations, both in earlier times (education in particular) and now as they age and die.

The result? Continue reading

The Price To Pay For Spending Tomorrow’s Income Today

When you borrow, you’ll pulling spending forward, that is, you’re spending tomorrow’s income today. Sometimes that’s smart; sometimes it isn’t. In fact, debt can be a killer.

It can kill your retirement. Your security and well-being. Your marriage. Your job. Your dreams. Even your life (suicide rates rise during recessions and periods of high unemployment).

Yet America is in love with debt. But perhaps it’s a toxic love affair. Perhaps, Vera, you’d do well not to fall in love with debt as so many of your fellow Americans have done.

Not all debt is bad though. Continue reading