Wednesday, January 17, 2007

Living in Debt - All bad?

I've spent most of my lifetime, since I left college, with a lot of debt. I've never missed a payment on any of it but it has created a lot of stress at times in my life. For my wife, debt is an extremely worrisome aspect of our marriage. She had only one debt in her life - a mortgage on her first home that she paid off in 5 years. Typically she was used to having a wallet full of cash - typically equivalent to $5,000US. I typically have less than $30 cash in my wallet.

I read a story on CNNmoney today about being Grown-up about Debt. This article focuses on people that seem to spend compulsively on non-essentials using their credit cards. To be honest, that has never been my problem. I tend to invest compulsively in education, businesses, and kids.

Here's a list of things I don't pay for with credit:

  • vacations
  • furniture
  • cars
  • dining out
  • Christmas gifts
  • entertainment

But I do use credit extensively. Here's what I have borrowed for:

  • purchasing property (well over $1,500,000 so far)
  • education (college, business seminars, real estate courses - about $30k)
  • legal fees (a $30K divorce bill)
  • adoptions (close to $100k)
  • property improvements (not day to day repairs - just major upgrades)
  • Business start ups (over $50k)

So do I use credit stupidly? Or is the use of any type of debt a bad decision? (My wife thinks it may be.) My first inclination is to defend my debt as "good debt", but I want to step back and really think about this first.

Consider my wife's lifestyle in China. She had her own home completely paid for, she saved up enough cash to even purchase a home for her parents with no mortgage. She always had cash reserves of 6 years of a typical Chinese citizen's income. She did this working as an accountant and living well below her means for 20 years after college and she did it primarily without the resources of a spouse. Her life was completely stress-free from a financial standpoint. At the time I met her, she had a pretty nice lifestyle - eating out whenever she desired, buying whatever cloths she wanted, travelling to nice vacation destinations - a very upper middle class lifestyle.

My life, on the other hand, has always been filled with financial stress. Making sure the dozens of bills I have get paid every month, managing unexpected financial needs, moving money around to get a better interest rate or refinancing when a balloon payment is due. I need to look at my on-line checking nearly every day to manage all my accounts. I rarely dine out and take but one vacation a year. Yet my income is supposedly great (over $100k per year). Comparing the two lifestyles, my wife's wins hands down.

Most of us have been led to believe that we need to spend what ever it takes to get a good college education. Now, I probably got my money's worth from my Engineering degrees. But with the cost of a college education escalating so rapidly, I think that for a lot of people it is a poor investment. The WSJ had a good article today on this.

Now, I think education is indispensable. But some things that are not taught at school affect your finances much more than what is taught. For example, a course on choosing a mate and how to develop a lasting relationship would have been a big help to me! Education with an emphasis on savings, not using credit for luxury or non-essentials, investing, and money management would all be higher priority than English literature. But more importantly, getting an education from someone who has succeeded in the field you have chosen is a lot more important than getting an education from someone with just a degree.

Now I think that some debt can be very good. As I wrote previously, using leverage to purchase real estate can turn your small amount of money into large amounts. However, even for real estate this may be a bad decision if you purchase your property at market value in an area that is not growing well. I think that if you treat your real estate purchase first as an investment, not as a cocoon, then it's a good use of debt.

Debt to buy a business can also be good. I've watched two of my brothers buy accounting practices and turn them into very profitable companies. My sister-in-law has also used debt financing to turn her business idea into a multi-million dollar enterprise.

So today my list of what to use debt for is very small:

  • education - but only for those fields where there is a good payback. Getting a degree for the sake of a degree is probably not worth it. Get a more specific education in a field where you can start a business.
  • real estate - again only when you buy with the intent of making a profit. Buying a house you can barely afford to make your spouse comfortable doesn't fit my model
  • business - with the caveat that you have a well developed business plan and are committed to making it work what ever it takes.

Today most people expect that they should live a good lifestyle what ever their financial situation. They want to live in a home nicer than their parents and drive the latest model cars and take expensive vacations. They want to have the reward before they have paid the price of success. So we use debt and pay the consequences all of our life. This is exactly backwards from what really successful people do. Pay the price first.

The Bible teaches this from Proverbs 24:27

27 Finish your outdoor work and get your fields ready; after that,
build your house.


Anonymous said...

"Typically she was used to having a wallet full of cash - typically equivalent to $5,000US"

this would be a huge wad of cash as thick as a brick, over 40,000 rmb in 100yuan notes (the highest denomination)

No one back then, walked around with that sort of money. No one. Either your wife is lying about her life, which from your comments about her suggest the former or you are mistaken.

Paul said...

"back then"??

You must have been in China a long time ago. None of your comments make sense to me.

Yes, my wife had lots of cash when I visited her. Much of it was in US dollars. When we went shopping I often observed others with large amounts of cash as well.

Anonymous said...

"back then", referring to the 90's. Now, someone might be carrying that sort of cash if they are a drug dealer. Since most affluent Chinese use plastic (debit and credit)

Paul said...

I wasn't there in the 90's.

The problem with plastic in China is the banking system is not integrated. One bank may not accept another's plastic. My wife was not rich but she was quite upper middle class. She had plastic but much preferred cash.

Anonymous said...

Paul that is not true. Off the top of my head you can get a "union pay" debit card from any bank that can be used in any type of transactions from Harbin to Hainan including Hong Kong (you can't use it to book a hotel in Hong Kong but you can still pay with it)

No one walks around with that type of cash and you know I'm telling the truth. How do you fit that in a wallet? it's the size of a brick.