I grew up loathing debt. Perhaps it’s the Indian/Asian culture I was raised in. Asians, for the most part, and until recently, used to be allergic to debt.
From a young age, we were told “If you can’t afford to pay for it in cash, you don’t buy it,” and “Cash is king.” There was a somewhat healthy mistrust towards financial institutions and so if there were a need for money in our extended family, we would borrow from each other. “Keep it in the family,” my parents would say.
So, it’s no wonder I also learned early on to never help credit card companies and banks make money off my hard-earned money unless I was benefitting more than they were!
I’m still quite averse to debt. I can stomach good debt to a degree. I loathe bad debt. (Yes, there’s such a thing as good and bad debt as you’ll see later). So when I see the statistics surround debt today, I’m completely gobsmacked as to why as a society, we’re not willing to address this ticking time-bomb.
- Governments and households are addicted to debt more than ever. In fact, in 2019 we hit a global record of US$250 Trillion of debt. That’s three times the actual global economic output all humans produce. Yikes!
- Household debt for Canadians continues to rise. All the while, disposable income has risen which means many are choosing to spend the extra rather than save for the future.
Canada’s household debt load rose to 175.9% in the third quarter of 2019, while personal insolvencies climbed 10% from the same period last year.
- Some $1.5 Trillion of student debt is crippling 44 million young Americans, with most wondering how they’ll ever pay it off. It’s predicted that 40% of borrowers will default on their loans within five years.
- China’s household debt hit 60% of GDP at the end of 2018, sounding off alarm bells by government policymakers.
If you’re wondering why you should care – let me explain the ugly truth about debt:
A high-level of personal debt means you are sacrificing your future security and ability to make healthy financial choices.
If you’re a slave to debt, it means you’re likely thinking short-term. I.e., how to survive paycheque to paycheque. How to find other debt to fund your lifestyle today.
Yet, saving for big financial goals such as retirement where you’ll be living on whatever you make for 25+ years, requires long-term planning and building wealth through saving and investing. This will prove to be very difficult for you to do if you are in a vicious debt cycle.
If you’re knee-deep in debt, there’s a high chance your decisions on what to spend on is not aligned to what you truly value.
You’re likely making decisions based on short-term relief rather than long-term happiness. Be honest. Go through your last credit card statement and scan the items you bought. Ask yourself, did you buy something that would make you look good to someone else or win approval from someone? Did you buy something to relieve your boredom? Did you buy something to help you forget about your challenges temporarily?
This doesn’t mean you can’t treat yourself once in awhile. Self-care is important. Fun is nourishment for the soul. Just be sure you’re not sacrificing your principles as a result.
Debt wreaks havoc on your health.
When we know we owe money to someone, it weighs us down. We lose our power to others, and we often lose confidence in our ability to get back on track.
So it won’t come as a surprise to know if you’re dealing with financial stress, you’re twice as likely to report poor overall health and have a higher chance of getting high blood pressure and heart disease or becoming depressed. You’re four times likely to suffer from insomnia, and you’re much more likely to develop conflicts in your personal relationships.
Too many governments are crippled with debt, and there will come a time where we will pay a hefty price.
I will argue that most governments are far more irresponsible with their money and taxpayers’ money than any individual could possibly be. We’ve seen most politicians use cheap debt to try to stimulate the economy, encourage us to spend and prop up stock markets and ultimately keep themselves in power.
The problem with all of this is the short-sidedness. This cheap debt means these nations become beholden to others to keep them going down this path. I’d also argue that too much money is being used to service the interest on the debt rather than being invested in the economy.
So at some point, they will have to deal with the snowballing debt – either by jacking up taxes or drastically cutting support. Who ultimately will be left holding the bag? Us.
When people ask me why they should bother caring about their own debt when the government doesn’t care about their own, I tell them it’s exactly why they should care. There may never be a bailout. The cash-starved can’t help the cash-starved.
So if you have a lot of debt, I hope that the insight I’m providing gives you the motivation to shift your mindset and behavior – to see debt differently – and to make changes to get your debt under control so you have ultimate control of your life.
Here’s my Saij Advice:
Leverage the good debt. Demolish bad debt.
Yes, there is such a thing as “good debt”. There are situations where taking on debt will actually lift your financial prospects, so that type is worth considering.
Good debt is used to finance investments that are projected to either produce income or appreciate in value. The key here is to understand what is an investment or an asset, rather than a liability.
For example, mortgage debt can be considered good debt when it’s being used as leverage to build up equity in your home that can be used in the future. We’ve seen plenty of evidence of this in the past 10-15 years. The assumption, however, is that over the longer-term home prices will appreciate – hopefully, more than the carrying costs to hold a mortgage.
Student loans are considered good debt because it’s an investment in your future self and ability to earn income.
Auto loans and credit card debt are NOT examples of good debt. Cars lose their value over time. And the cost of carrying a balance on a credit card is more than 15% in interest on things like personal items that lose most of their value almost immediately!
Consolidate your debt.
If you’re serious about slaying your bad debt, I’m mean really determined – consider getting a debt consolidation loan. This will help in merging your numerous debts into one – so you simplify your payments and you use it to pay off higher-interest debts using the loan that will be at a lower interest rate.
To learn about this option, I’d suggest visiting your bank or credit union to see if this is a possibility. Understand the terms and obligations before taking this on. The most important thing here is being honest about your behavior and the ability to stick to the plan!