Bill’s Blog September 10, 2020
I have been a financial advisor for almost 15 years, and one of the most difficult discussions I will have with clients happens when I see they have too much debt. Many people are deeply in denial about the seriousness of having too much debt. They rationalize…” well everyone has debt”. Not true. Yes, most people do have debt and for many it has become a heavy burden they can barely carry. So how do you know if you have too much debt and what are the warning signs?
- You purchase everything on credit
- You carry a balance on your credit cards
- You are credit is MAXED out often
- You make minimum payments and they are difficult to pay
- You have no plan to get out of debt
- You have regular arguments around your debt and spending habits with your partner
- You have no savings or even plan to save
- You keep having to refinance your home to survive
- Your banker says to you, “this is the last refinance”
- You max out your credit cards and then apply for more
- You are under severe financial stress and often you do not sleep well
- You are often getting physical sick from the stress
They say, “stress is the silent killer” and I would not disagree…especially extreme and prolonged stress. But equally, “debt is a silent killer”, and when it gets out of control it produces extreme stress in a person’s life. I know debt is an uncomfortable topic to discuss but if you are honest with yourself… it needs to be done. I have pondered my own life and the debt challenges I have experienced in my past. Why did I go down that destructive path? The main reasons for stumbling into the debt trap are these:
- Number 1: The lack of financial education. This was my own story and I have had to learn from the school of hard knocks. Growing up, I had almost zero intelligent discussion on handling money or the dangers of debt. Also, I have no memory of learning about these important life topics in all my educational years. Maybe this is your story too. Truthfully, you do not need a PHD in finance; but you do need to take personal responsibility to learn the important financial stuff (this applies to both men and women). If you are not willing to do that for yourself and family, then you will or have already experienced a lot of financial pain in your life. You can change that now, by learning and applying sound financial principles to your life. I had to do this myself and I continue to learn and grow. Studying solid financial principles has paid huge dividends to my own financial health.
- Number 2: Debt is way to easy to get and it is daily promoted in the media with tempting ads. They often use catchy jingles and humor to make light of debt. Have you ever stopped to think, “why is debt pedaled so hard by financial institutions”? The answer is simple. Institutions make a ton of money (Interest) off you and me. Lending money is a VERY lucrative business.
- Number 3: You believe all debt is healthy and normal
Did you know that less than 200 years ago, very few people had debt? Except for kings/government (for empire expansion and wars), and business people who wanted to grow their business with new machines/land/etc. Average people like you and me had no debt. Average people saved and paid cash for what you needed.
As I mentioned, I have made a few poor debt decisions in my life. But in reflection, I have made far more good decisions. We have handled 100% of my education costs and my wife’s (9 years combined) with no debt. I have been blessed to travel to many nations mostly with my wife (15 and counting) with no debt. How did I do it? We saved and paid cash. When we have a valid need like new car tires or something we want or desire…we will do our homework and save until we have the full amount to purchase it. We have no car debt and we have not purchased a vehicle with debt in over 15 years (I will never purchase a new vehicle, only quality used). We have no mortgage debt by choice, because we sold our last home several years ago and have decided to rent for this season. This was a very personal decision, so I am not suggesting everyone should sell their home who have a mortgage. The more I educated myself on sound financial principles and economic history, the more I saw debt as a trap or even bondage…not a benefit in most cases.
Now I want to make it very clear: I am not saying there are no valid reasons for debt. Some can be good debt. What do I mean by good debt? It means you are borrowing for assets that produce significant positive cash-flow or for appreciating assets over long periods of time and preferably with cash flow. Example: you are a successful business women who has a very profitable manufacturing business. You do your homework on expansion. You determine that if I purchase this new piece of equipment, I can grow my business by 40% and the profits will pay off the machine in 2.5 years. Now that is good debt. Another good example: you save up 30% to purchase a small apartment block (30 units). You crunch the numbers and carefully check the apartment owners past 5 years of revenue and expenses records (before you purchase). You discover you can have significant cash-flow and you can pay off the building in 14 years…now that would be a good debt. Plus, in both examples, you get to write off the interest cost of the loans.
Most debts are simply bad debts – buying depreciating things that never cash flow. These debts ultimately create incredible stress and rob your income. For many people, they end up with financial bankruptcy and worse relationship failure over too much debt. A famous American author was once asked, “how did you go bankrupt”? His response to the reporter was this, “At first, very slowly and then suddenly”. So, if you have found yourself in a debt trap… what are you to do? Here are a few positive steps you can take to get free of debt. First, don’t beat yourself up as we all make mistakes…just learn from them and do not repeat them!
- Admit you have a serious debt problem and get help
- Many people need professional debt counselling to understand their options. Make sure you understand ALL your options and the ramifications before you do anything. You may need to talk to 2 or 3 professionals before your make your final decision.
- You need to educate yourself on basic money management and financial planning. Again, you may need to seek out those with a solid track record and those who practise what they recommend. Don’t be afraid to ask, “do you do this yourself and for how many years”? No one does it perfectly – including myself – however, if a person offering counsel does not practise good financial disciplines in their own life…find someone who does.
- For most people, it has taken years to get themselves into a serious financial crisis. So, don’t except your solution to take days or months to resolve.
- You will need to change the way you think about money, about debt and to practise new financial disciplines to free yourself from the debt-trap.
- You will need a plan, new strategies and ideas to transform your financial health.
- Remember you can change with good support and a solid long-term plan.
If you need help please feel free to reach out to me, and I maybe able to provide guidance. 778-539-7107 or bill@fivefoldfinancial.ca
Best regards,
Bill