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Friday, March 31, 2017

Overly Comfortable with Debt

Posted by Tim Stobbs on May 25, 2009

I finished watching a show last night called I.O.U.S.A. on CBC which had the general message of the USA is up to it’s eyeballs and drowning in debt.  What I found interesting about the amount of  the US national debt at the time of the movie was $8.7 trillion dollars.  Yet when you added in all the other liabilities like unfunded Social Security and Medicare the total ballooned to $53 trillion dollars.

WOW!  That’s one hell of a mortgage for a country to have.  So I began to wonder is a country and its citizens sort of like parents teaching their kids.  Is the fact that our governments are so used to being in debt setting the stage for us to all be a bit too overly comfortable with debt?

For example,  do you know anyone who is completely debt free?  No mortgage, no line of credit, no nothing.  I personally began to think about this and realize I can only think of one person I know.  I image you would have a similar experience, that you could likely not list ten people you know who are completely debt free.  So on an informal basis we are all in debt for the most part, is that a good thing for a country to have?  We all have debt so it must be alright, right?

If this familiarity with debt causing us to have unrealistic expectations in our lives?  Have you seen some of the condos and housing people are calling ‘starter homes’ in ads today?  My current house isn’t that nice.  Then it just goes on and on.  People buy new cars right after getting their first job, does that even make sense when you already owe $10,000’s of dollars in debt from your education?  We look everywhere and see nice things other people have all paid for with debt and don’t realize that it is a false illusion of wealth.

Is one of the major issues we have collectively that we are too used to being in debt? Do we need to collectively start pressuring each other and our governments to be more responsible with debt?  Should keeping up with everyone else mean not having a credit card balance and a modest mortgage?  It would be an interesting place to live where not having debt was more of a sign of status than what you drive or where you live.  Unfortunately, being debt free is hardly sexy with living in a smaller home and driving an used car so the marketing is going to be difficult to convince people to change.

Am I overly comfortable with debt?  Yes, I would say I am.  I don’t freak out that owe $135,000 dollars to the bank for my house, but in reality that is a huge amount of money to be owing.  I also don’t mind using the line of credit once in a while.   So how about you?  Are you too comfortable with debt or not?

Comments

15 Responses to “Overly Comfortable with Debt”
  1. DabCan says:

    I wonder if it’s the ease at which we can borrow money that is part of the problem. I was thinking the other day that 30 years ago when my parents would have been just starting out, lines of credit and loans couldn’t be had automatically online, you had to go into a bank and tell someone face to face that you needed money, and why you needed it. Now, you can get a credit card online and spend it on whatever you chose, no one will question your purchases, and the credit cards are more than happy to increase your limit as the more debt you rack up, the greater the chance that they’ll make some interest off of you. I think it’s all become far too easy to spend beyond your means and get into debt fast.

  2. I believe what is really missing from all this bail-out/stimulus dialogue is, fundamentally, we cannot sustain this life-style because you can only borrow from the future so much before there’s nothing left to borrow.

    It is not debt per se but the sheer level of debt vs personal worth that should have everyone worried but the solution is unplatable for everyone to contemplate- cut back our life-style, our entitlements and our way of life.

    As an absolute figure, the $135K is scary but if you have put a lot of equity into your home, as a relative figure, you should be fine.

  3. John says:

    I’m totally uncomfortable with debt – to finance my education, or to buy a house, okay, but beyond that, I avoid it like crazy. I drive an old car, and own an old motorcycle, but they’re paid for.

    By my calculations, that $53T debt works out to about 180k/per person, based on 300M Americans. Maybe we need to start assessing our “national net worth” and make some hard decisions – how long can this level of debt be sustained? Scary.

  4. Adam says:

    I agree.

    What I do focus on, in conjunction with debt, is personal net worth. This is a reflection on what you have spent your $$ on – financed or not.

    What the scariest part of the US debt figure is, is the proportion of that number that is allocated to consumer spending and not asset backed expenditures. Their balance sheet looks horrible.

    I owe a large amount due to my mortgage as well, but I also know that I sunk 25% cash into that asset as a down payment. My balance sheet is good.

    Funny thing is I finally convinced my brother to visit the bank and refinance and consolidate his various loans (Business Owner) at a better rate. It worked, and he can now pay everything off in a shorter span of time. He just informed me that he will be purchasing a motorcycle… :( I explained to him that he was being irresponsible – but at what point do we have a right to shame others for poor financial decisions?

    I wish it was more sexy to be money-wise…

  5. I’d say that I am comfortable with debt, but not overly so.

    The only interest-bearing debt that I have is my mortgage. I also have a little non-interest bearing debt, from payment plans for car repairs.

    I will probably have to add some debt in the next couple of years, when I replace my 10-year old car (bought brand new).

  6. Living under the radar says:

    My wife and and are both, by nature, somewhat frugal and debt aware. We worked hard to pay off the debt on our modest but comfortable home,(now 450K) ( 8 years on a 25 year mortage), then bought the neighbors house across the street and rented it out (was 165K now 325K) ( paid off in 3 years), then bought the house of the neighbor next to us (175K now 400K) ( rented out and paid off in 3 years). We incorporated a small business, and buy all of our depreciating assets that we legally can ( vehicles, computers, etc. through the company – why pay with after tax dollars or borrowed money on a depreciating asset?) We’ve dollar cost averaged into a few low MER mutual funds ( 400K), and have the rest in cash and gold (200K). Debt is a dirty word to us, and we don’t care what the world thinks. I guess the key is to surround yourself with friends that think the same way and not to hang around the ‘Jones’ ‘ of the world. We sleep pretty well at night knowing we have zero debt and a nice group of appreciating assets. We’re 49 and have been financially independent for quite a few years.

    Our thinking always was simple ( like us, some would claim ;) ). Debt is a reverse investment, and by paying off a 5% mortage, with after tax dollars, for example – wow, you’d have to be getting a hefty return to match that. And guess what, there are no MER fees or market timing, or “oh, you shoulda’ bought THIS stock instead of that mutual fund”. It’s really a no brainer and the fastest way to accumulate real wealth.

    Nice blog by the way. Keep it up!

  7. Canadian Dream says:

    Living under the radar,

    Great story, thanks for sharing. I agree paying down debt is a great investment for the long haul.

    Everyone else,

    Great comments and excellent discussion.

    Tim

  8. Astin says:

    I’m debt-free, a couple friends are debt-free, my parents are debt-free, my grandparents were all debt-free when they were alive, I believe most of my aunts and uncles are debt-free…

    One might believe that being raised to avoid unnecessary, and non-beneficial (ie.- debt except as a tax strategy) debt takes root.

  9. zeromoney says:

    I found this interesting (although the numbers are from 2007)

    Canada is in debt roughly $26,000 per person, the United states is in debt roughly $29,000 per person. (both figures in Canadian dollars)

    Not sure how that fits into the overall picture, but it was definitely interesting. I didn’t think we’d be nearly as bad off.

    http://www93.wolframalpha.com/input/?i=+canada+debt+/+population

    http://www93.wolframalpha.com/input/?i=+us+debt+/+population

  10. Julie says:

    I want to hear more from living under the radar!

  11. Living under the radar says:

    Julie;

    I’d be glad to share, but this really is Tim’s blog ;) The strategy that worked best for us was to look at cashflow rather than just looking at savings, or chasing returns. We also looked at what worked for us in a holistic sense. We both enjoy people and I enjoy a part-time role as Mr. Fix-it on our house rentals, so the buying up the neighborhood and renting out houses allowed us to create our own little commune. We plan on staying in our house, so wouldn’t it be nice to pick your own neighbors? And if things don’t work out with them there’s always the SRI factor (Sudden Rent Increase). The mix is really great now, we keep our rents reasonable, have great tenants, and have a steady stream of ‘retirement’ income. We incorporated and started a small business, in an area related to our interests, and in something the whole family enjoys and can be done as a home based business. Because corporations are their own legal entity, they only pay taxes on profit, not earnings. This allowed us to do income streaming to control our personal level of T4 taxation, declare a T5 dividend when necessary and depreciate assets against profit, therby reducing our overall tax burden. Obviously, the deductions must be on assets that are used in the generation of income for the business, and the tables of depreciation are on a fixed basis, based on the percentage of use for business use. We consulted a lawyer and accountant who specialize in tax law when we set the business up at the start up, and I would advise that they are well worth the investment.

    By re-investing the rental incomes and business profits, we were able to purchase assets that generated cash in a tax perferred basis. If a person is able to live within a low tax bracket from their T4 income (which you can stream out to family members who perfom duties for your company), you can reduce your overall tax bill, which is the biggest hurdle to accumulating wealth that most Canadian’s face.

    We diversified into some gold and cash, knowing full well that the US dollar is in for a turbulent time when the ‘package’ gets some traction and inflation grabs hold. We are 50/50 in bonds and broadbased equities, but are going to back off on that over the next few months, as we are betting the north american markets are set for another slide soon. Diversification and asset allocation have seemed to work out so far, oh yeah, and low risk, we aren’t big on risk.

    For us, the keys were finding investment vehicles that matched our ‘hippy’ lifestyle, and retaining control of our assets in our own hands; in our mind, we love being able to look out our window and see our assets everyday, knowing we set the rent and we pick our tenants, then going down to our small business downstairs and knowing we control the cashflow, the clients, the type of people we hire and the people we work for. To us (and it’s a very personal choice), this control gives us the freedom to be what we want to be and how we do it.

    And that freedom fits with our overall life goals.

    Eliminating debt was a small step in the chain of events, but it worked for our lifestyle, for sure.

    Other just as important keys are personal frugality, and finding the right ‘hippy chick’ (or hippy guy, or hippy friends, or hippy cat) that share your vision and want to share it all with you. Never lose focus on the fact that cash is cool, but it’s only a tool.

    :)

  12. Canadian Dream says:

    LuR,

    Great reply and thanks for answering Julie’s request. I really don’t mind guest posts, so really go ahead and borrow the blog for a day if you want.

    Tim

  13. Emperor says:

    I am uncomfortable with debt because having debts means I am more dependant on a steady revenue stream to get by, e.g. less freedom.

    I am debt free since 2 years now and all I can say is that it’s one of the best financial move I made in my life, the relief is astonishing.

  14. Julie says:

    Thanks very much LutR – your story is really inspiring. You and your wife have worked hard and smart and been disciplined in order to reach your goals and make the life you wish to have. A lot of people could learn from your story — you should take Tim up on the idea of a future guest post.

    I’m debt-free and on my way to financial independence but am still looking (though probably not hard enough) for that frugal, hippy guy! :)

    Hope to hear more from you in the blogosphere and thanks again for sharing your story.

  15. Nothing wrong with debt, as mentioned net worth and personal balance sheet are key.

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