Lately, debt has been on my mind. America has been addicted to it as long as I’ve been alive. Our government is in debt, companies are in debt, individuals are in debt… even my local CDD is in debt. Credit is a dangerous tool, one that is easily turned on the wielder. Thus the comparison to opioids. What may have a use in certain cases, especially emergencies, may become addictive and deadly if not managed properly.
Recently, I rejoined an ancient computer hardware forum, and some of the folks there were discussing credit. As is normal for me these days, I expressed my general aversion to debt, and extolled the wisdom of living with your means. The hostility this engendered was, perhaps, worse than if I had declared myself a worshiper of Lucifer. It was like I had personally run up to their homes and kicked their dogs. Or, perhaps more appropriate to the title of this post, as if I had suggest that the opium user should quit his habit.
A few of the forum denizens explained that it was better to buy expensive things on credit, if the interest rates were low, and then invest the cash at a presumably higher rate. And sure, playing the spread between interest rates is an old trick. But here’s the kicker: how many of them were actually doing this? I hear this excuse all the time from folks I know have little to no liquid assets. It’s a lot like the addict saying “I can quit any time I want.” They claim they can sell the car, or furniture, or whatever they bought on credit whenever they want, and that debt can have beneficial effects too.
If it truly worked this way in practice, there’d be a lot less bankruptcies and delinquencies, I think.
Perhaps some folks do play the spread between investment returns and low loan rates successfully, and there is nothing wrong with such a strategy, if well executed. But they are surely outnumbered by folks who use this as a quick excuse to load up on things they want, and can’t afford. It is the same with folks who claim they are using their credit cards for the points, or the rewards. Some people do this successfully (my in-laws play this game very well). But a hefty fraction use this to excuse their credit addiction, and wind up carrying balances, easily wiping out any gains from rewards or airline miles.
Another excuse is that credit cards are more secure than debit cards, for a variety of reasons. It’s easier to cancel a charge than to reverse a debit transaction, and the credit card puts an extra layer of defense between your savings and checking accounts (or wads of cash that can be mugged from you) on the one hand, and the merchant on the other. Again, there is truth to this. I actually employ such a strategy myself. I exclusively use a credit card for most medium-to-major purchases (and all online purchases), and have the full balance paid each month automatically, so balances are never carried and I don’t get charged interest. But how many folks actually do this, and how many use it as an enabling excuse?
Some quick statistics on credit usage:
The average household with credit card debt pays a total of $1,292 in credit card interest per year.
That’s $1,300 flushed down the toilet every year. The average balance held by folks who had credit card debt was $16,748.
The average auto loan balance, again for folks who have auto loans, was $28,948.
Probably worst of all is the average student loan balance of $49,905.
Finally we have mortgage debt, which averages at $176,222.
Now a lot of folks will balk at the mortgage debt figure, but the fact remains, as I’ve said before, that mortgage debt isn’t “good” either, at least not personal mortgages. In a business situation, the optics are a little better, as business is, in essence, always a game of calculated risk and reward. But this is a game that can screw over the individual very quickly. The worst case from a business perspective is that the business fails. If you don’t have personal liability for the business, well, it still sucks, but you’ll be okay.
Some folks may talk about the mortgage interest exemption, and the low rates of mortgages these days, and the fact that houses are just so damned expensive. These things are all true. And in my case, I still do have a mortgage (though it is much less than the average, at least). I regard this as a personal failure, however, and I would not recommend that others do it. Indeed, eliminating the mortgage is my highest financial priority. I picked up a considerable amount of extra work solely to pay this down as quickly as possible. If my readers wonder why some days The Declination doesn’t get an update, there you have it. I’m probably pulling another 12-14 hour workday.
If I had it to do over again, I’d buy a travel trailer when I turned 18, park it on a piece of crappy land someplace, live on the cheap and stash my money for a decade. At the end of it, I’d have been able to buy a house, car, and anything I wanted in cash. And I absolutely mean that. The only reason I don’t now is that I have a family, and the place we are at is good for my family, and I’m pretty certain I can pay this off in a couple more years. Even then, this is no excuse. Getting a mortgage was a mistake, one I must mitigate as best I can.
Now, if you feel you can earn a better return on your money playing the spread between mortgage rates and investment returns, by all means, do so. But if you don’t have the liquid assets to pay it off at any time, it’s not a good idea.
Sometimes I suspect my grandfather’s generation, who lived during the Great Depression, was much wiser in this. They knew the dangers of debt, and the vagaries of banking. They didn’t trust the government or the banks, sometimes in almost comical fashion. One grandparent of mine was fond of stashing wads of cash in utterly bizarre places throughout the house, places no one would think to look. A family friend buried guns in a sealed box in the backyard, just in case the government ever decided to come for them. Another had stashes of gold he kept hidden. Folks from that era were far more suspicious and less trusting. And certainly, my grandparents were not fond of debt. Neither side of the family carried a mortgage, or ever financed a car.
We’ve come to the age when a smart man can rationalize away conventional wisdom in favor of his addictions. He can talk a good game, and tell himself it’s all okay, and what he is doing is supremely clever. But conventional wisdom survived some terrible times in history… and historically, spendthrifts often come to bad ends. And the rationalizations aren’t so different from the addict telling folks that he can handle his habit, and that he’s not really addicted. After all, he can quit any time he wants to, right?