Sep 152016
 

Staying in Debt Forever

Sometimes I get asked if I will ever be debt free. Unfortunately I don’t have a good answer for this question. In my previous post earlier this week I discussed the debt spectrum, which describes debt as a financial state along a sempiternal line. This line stretches out in both directions and has no ends in sight because it’s hard to put a limit on the amount of debt we can lend or borrow. For example, it’s common today for regular folks in Zimbabwe to hold literally quadrillions of dollars of debt in their outdated, but still existing currency. 1 quadrillion looks like this: 1,000,000,000,000,000.😁

Compared to a huge number like that, it would appear most Canadians have a much more reasonable amount of debt. 🙂

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Of course that’s not a fair comparison, but the point is almost everyone has some form of debt or another. Since I believe in the debt spectrum concept, I don’t view debt as something that I can ever remove from my life completely.

To me debt is a continuous road that I’m constantly on. There’s no beginning and no end. I’m either a net debtor or a net creditor. I’m either buying debt or I’m selling debt. I use leverage when interest rates are low. I lend money to people who need it when interest rates are high. I might do both at the same time. Debt will always be a part of my life just as it is a part of the broader economy. My position on the debt spectrum will constantly shift from left to right depending on changing circumstances. But I will never not be on the spectrum.

Even in a high interest rate environment where I’m a net creditor, there could still be unique opportunities where I would borrow money. For example, I could use promotional credit card rates where I can borrow money at 2% and invest in a safe bond that yields 4%.

So it’s hard to answer the question if I’ll ever be debt free, because the idea of being “debt free” is kind of irrelevant within the context of the debt spectrum.

Being “debt free” on its own doesn’t mean a whole lot anyway. A barista could be debt free with a net worth of $0. But a stock broker could have $5 million worth of index funds in his portfolio with the help of a $50,000 margin loan. The first person is broke while the second person is a financially independent millionaire. But it’s impossible to tell by simply looking at their debts. This is why the debt spectrum is much more useful.

I like the debt spectrum concept because it provides a more holistic representation of one’s debt profile. It proves that we don’t have to be debt free to become millionaires. 🙂 Unfortunately it doesn’t actually tell us the details about each individual loan. But at least we can tell if someone is a net borrower of debt, or a net lender of debt, and how much net debt they have. By comparing where people are along the debt spectrum we can also get a better idea of their relative financial stability. The debt spectrum isn’t a perfect concept but it’s not a bad place to start learning about someone’s debt situation.

The numbers on the spectrum are only there to quantify the debt. But in some cases we can simply ignore the numbers. For example, if the cost of borrowing increases then I don’t have to know exactly what my new position on the debt spectrum should be, but I do know that it has to be to the left of where I was before. Another reason the numbers aren’t always useful is because debt is best measured in relative terms, similar to income, assets, and other financial terms that change with time.

Maybe there will be a day when I don’t owe money anymore. But even if that happens, I won’t be truly debt free because I’ll still be on the hook for government debts. 😛

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Financial Canadian
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Personally I don’t think I’ll ever be debt free. Margin is a fantastic tool to boost returns. And with the US Treasury yield touching 1.35 briefly earlier this year, it’s a fantastic time to leverage up!

Ryan
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Ryan

We are living in a very dangerous time right now. Central banks all over the world are printing money like crazy. The interest rate in Germany and Japan are negative; this is unprecedented. Historically, if you have a so-called balanced portfolio and a long-term perspective, you should be able to weather the typical downturn.

If you are highly leveraged, will you be able to withstand a major correction? Will you be able to pay the margin call?

I have a lot of skin in the stock market so I am not one of those fear mongering skeptic but your enthusiasm with margin is quite extreme when caution is warranted.

Anon
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Anon

“Margin is a fantastic tool to boost returns.”

As long as you are getting positive returns above your margin rate.

beth
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beth

You are a real risk taker and I am not. I consider taking on debt to invest to be very risky and it is not something I would do. I am in my early 50s and I wonder if age has something to do with your willingness to take on debt. Do you have any stats on age and debt?

I would like to retire in a few years and being debt free is something I need to be to step in to early retirement. You have years of work ahead of you to earn that money back and I really don’t want to have to work for too much longer.

Anon
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Anon

Did you take on debt to buy a house? Why would using debt to buy stocks be any more “risky”?

Age might have some effect on your perspective as you’d probably have to hold stocks for 25 years in order to negate short term volatility and attached risks. Being in your early 50’s, this timeline might not be that attractive to you.

Gen X Investor
Guest

I’ve always felt like the majority of people make poor choices with their debt. They use it to buy depreciating assets and other things that don’t pay them any income rather than use it to buy assets that will increase their cash flow. I’ve always used a little bit of leverage for my investments but nothing too extreme and it has always resulted in an increase in my monthly cash flow.

Phil
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Phil

Understanding your personal relationship with money and debt is key, what works for someone’s situation most likely will not work for someone else’s in the same fashion. Life has so many variables. Bottom line is to live within your means and understand your personal risks should the herd begin to run for cover. Debt is but a tool in one’s financial arsenal… hammer’s don’t open locks the same way as keys do, but sometimes to open the lock a hammer can be appropriate 😉 – Cheers

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[…] Freedom Thirty Five Blog says he’ll never be debt-free. […]

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[…] Debt is similar to a job. Nobody can force consumers to use their credit cards. It’s possible to go through life without taking on any personal debt. But relying on savings alone to make every purchase means losing out on choices, and opportunities. By the time a debt free saver accumulates enough to start college, all his friends who used student loan debt to get ahead would already be graduating. Why would anyone want to commit to a debt free life if it means depriving themselves of opportunities? This is why I concluded that I will probably never be debt free. […]