Why I Will Never be Free from Debt

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For example, it’s common today for regular folks in Zimbabwe to hold literally quadrillions of dollars of debt in their outdated, but still existing currency. 1 quadrillion looks like this: 1,000,000,000,000,000.😁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. 🙂

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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