LXXIV – Debt

Debt goes from something as subjective as feelings (i.e. debt of gratitude) to something as objective as money. This is another dissertation on the latter, more precisely on personal debt rather than the sovereign kind.

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Weeks ago, some of my colleagues were enthralled in a mortgage conversation, more precisely, interest rates. One of them had been able to negotiate with her bank a significant reduction and was encouraging others to shop around and follow suit.

More recently, – after having his interest rate decrease request rejected by his bank – E.C. was able to negotiate a far better deal (almost 2% less) with another financial institution. Yes, my mortgaged friends, you should seek and negotiate a better deal.

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E.C. was now negotiating a new loan to buy a four wheel drive. He argued that – in addition to wanting to camp in more inaccessible environments – the main reason was that even adding the new loan, he would be paying less than before.

There is nothing in E.C.’s reasoning that can be reasonably challenged… he is after all paying less and driving a new car on the beach. Personally however, this goes against my truth, but since mine is no truer than yours and the “true truth” is to be found somewhere in between… best of luck in your investments.

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It may be at times vital, but debt constrains freedom as it has the power to restrict choices and I can’t see any situation where it can be labelled as ‘good’. How can debt be good, other than for the loaner?

A definition of good debt is when an investment will: a) grow in value; or b) generate long-term income. That sounds reasonable and debt is indeed necessary for most entrepreneurial endeavours, but the fact that the ‘good’ can only be considered in hindsight is unacknowledged.

Not making it in any way ‘good’, there are four situations, where I am not entirely against debt: 1) a considered business venture; 2) mortgage (with some caveats – more below); 3) family emergency; and 4) education pursuits.

I wouldn’t hesitate to incur copious amounts of debt to battle a family member’s disease. I’m also sympathetic towards those that choose to borrow in order to reap the benefits of a higher education provided by private institutions. Though I do believe that, in the 21st century, the public option should be financially unrestricted (at the very least least for STEM disciplines) for all those seeking knowledge, not just those who can afford it.

 

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Based on their risk assessment and means available to safeguard their investment (collateral – a.k.a. your home or physical integrity), loaners will want you owing as much as possible for as long as possible. Having been there myself, I recognise how tempting it is to choose the highest available loan instead of the amount needed – wants will never be less than needs.angif-loan-shark-def

When we started looking into buying our first house, we set our maximum borrowing amount (that we could comfortably afford) and then proceeded to have a chat with our bank. Given our professional situation and income, the bank was willing to lend us more than double of what we required.

Absurd as it is, my sense of self-importance was considerably inflated simply because a financial institution had ‘valued’ me more than I did. It is not an uncommon feeling when others validate us by expanding on our own sense of self – Validated vanity, I say!

With re-established curiosity and armed with the knowledge of our ‘true worth’ (how can it be otherwise if the respectable big bank said so?), we filtered the house search criteria to a maximum price 20% above what we initially planned.

An utter conviction that our initial budget was inadequate took place immediately. As access to credit was augmented, so increased the benchmark for what we considered to be “minimum comfort”.

small-house-big-houseFinding reasons to support and confirm what one wants are easy to come up with, as we can convince ourselves of whatever it is we choose to believe. We now definitely ‘needed’ the upgraded finishes; the more practical layout of the rooms; the improved location (closer to work/shops; better neighbourhood; the highly rated public school); and the suddenly indispensable fourth bedroom… just in case.

Fortunately we ended up sticking to our initial plan. Playing a part in this strengthened position was the sensitivity analysis exercise of looking for houses 20% cheaper than our defined budget. It worked like a charm… our budget-type house was now impossibly better than any of those.

 

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My truth on the subject of personal debt/finances is full of practical and somewhat philosophical advice:

  • Live below your means;
  • You don’t have control over what you earn, only on what you spend;
  • Swap your credit card for a debit one;
  • Don’t spend more than 20-30% of the household’s income in rent/mortgage… downsize instead;
  • If you can’t pay off your mortgage within 5-7 years, don’t get it;
  • Create an emergency fund that will allow you to “stay alive” for 3-6 months with $0 income;
  • Being debt free is about financial freedom, not so much about financial gain;
  • Between having an inferior house with no mortgage or the dream one with financial encumbrances, choose the former;
  • Debt is one of the leading causes of anxiety, hence fertile ground for mental illness;
  • Debt should be the choice for when there is no choice.

 

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