CONVENTIONAL personal finance tells us that using a moderate amount of debt is clever because it permits us to fast-track our financial progress.
Should we stay in debt?
There is no doubt that correctly harnessing debt can accelerate our climb up the net wealth ladder. Note: Net wealth = net worth = the value of our assets minus our debts or liabilities.
The dangers we face, though, when we acclimate to using and reusing lengthening lines of credit are:
1. The psychologically easy allure of debt; and,
2. The reliance our world's financial system places on the expansion of credit.
First, let's face it: Most of us would much rather relish the good things of life sooner rather than later. With the explosion of consumer credit instruments like credit cards and personal loans in the second half of the 20th century and their further proliferation into our slice of the 21st century, "why wait?" has taken root in the cultural zeitgeist as the mantra of our time.
Second, conventional economic wisdom says the healthy use of debt by countries delivers with it better quality lives. As Alexander Hamilton, the American founding father immortalised in the hit stage musical Hamilton, wrote in 1781:
"A national debt, if it is not excessive, will be to us a national blessing."
To his credit, Hamilton did point out that such usage should not be "excessive". However, from our 2022 vantage point, we can say with utter clarity that in the intervening 24 decades we've discovered and rediscovered that humanity isn't great at keeping a lid on its excesses.
UNCHANGING PRINCIPLES
If like me, you're old enough to have weathered several global economic crises that strike us roughly every decade — typically at seven- to 12-year intervals — you'll recognise two divergent phenomena:
1. The minority of wisely prepared individuals who weather economic storms superlatively well, and who then emerge stronger and wealthier from each crisis, share two traits: low or no personal debt and large cash reserves; and,
2. The majority of nations sink deeper into growing pits of sovereign debt as they borrow billions (now trillions) to create counter cyclical recoveries to make up for falling consumer and business expenditures during the tough times.
The work I do in my small professional practice centres exclusively on helping individuals and families harness timeless financial planning principles to enjoy generational economic uplift.
I do nothing at the national policy-setting level because that isn't my role and, frankly, because I lack the skill set to contribute meaningfully to viable government policy.
So, within my circle of influence, which encompasses regular people trying to make it in an increasingly belligerent and — given Russia's current evil and violent aggression toward Ukraine — scary world, I repeatedly say to family, friends, clients, audiences, viewers and readers that the value of clinging to unchanging principles is immense.
My favourite Hamilton contemporary is his co-founding father and polymath Benjamin Franklin, who managed his finances so well that he was able to retire from his printing business in 1748 at the age of 42, which turned out to be the mid-point of his 84-year lifespan.
In the second half of Ben Franklin's life, he contributed in exponential ways to his community and later to the establishment of the United States as a sovereign nation after defeating colonial Britain.
In 1757, Franklin wrote (in his lengthy essay, which is now sold worldwide as different editions of a brief book) The Way to Wealth (TWtW):
"Think what you do when you run in Debt; You give to another Power over your Liberty."
Elsewhere in TWtW, Franklin extended this grave advice: "Rather go to Bed supperless than rise in Debt."
PLAY IT SMART
In our day and age, such advice is counter-cultural. But as we look around us at all that's wrong with Planet Earth, perhaps going against the flow in this area of life is smart.
As I write this, Ray Dalio stands as the 108th wealthiest person alive with a Bloomberg-estimated net worth of US$16.1 billion. He is the founder and co-CIO (chief investment officer) of the world's largest hedge fund Bridgewater Associates. In his recent book The Changing World Order, Dalio writes:
"At no point in our lifetimes have interest rates been so low or negative on so much debt as they are of this writing…. In 2021, more than (US)$16 trillion of debt was at negative interest rates and an unusually large amount of additional new debt will soon need to be sold to finance deficits."
We might assume that the 18th century keeper of colonial America's purse, Hamilton, is now spinning in his grave. So, what should you or I, the little guy, do as geopolitical risks surge?
First, don't despair. All of life is cyclical. Things may look dark now but brighter times will return one day. Second, do de-gear. Work hard and smart to earn more money; control your expenses; retire your debts.
Third, raise your cash savings and ferret out opportunities to invest boldly as different markets tumble at various times. You see, in due course they will recover. You want to make sure that as and when they do get better, so too will your personal economic prospects.
© 2022 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).