“Money is in some respects life’s fire: it is an excellent servant, but a terrible master”
– Art of Money Getting (1880) Chapter 3: Avoid Debt - P.T. Barnum (founder of the Barnum & Bailey Circus).
If I were to take the liberty of adapting this quote for myself and my clients, I might suggest debt can be like fire: an excellent servant but a terrible master.
Loans, financing, mortgages, lines of credit… all types of debt is using other people’s money to get the things you want NOW.
Debt means leverage – gains and losses are both magnified. Anyone carrying a lot of debt should get ready for either:
- delightful wealth creation, or
- terrifying wealth destruction
A “debt fire” can certainly keep you warm through a tricky financial patch, or can be part of a strategy to achieve a financial goal, but as a financial professional I’m concerned that safety and education around the use of debt isn’t nearly where it needs to be.
Happily, not many have been burned by a mortgage in my hometown of Vancouver for quite some time. The sensational rise of real estate values here means many have become very wealthy (at least on paper). Many Vancouver homeowners now sit on over $2,000,000 in assets! Perhaps a bit strange for a city of average pre-tax household incomes around $76,000.
Unhappily, I believe this good fortune has bred in many a mentality of “debt pyromania.” Canadians now carry much more debt than our American neighbours, which surprises many.
So, how to avoid getting burnt? Answer these two fundamental questions regularly:
- If everything I owned were to lose 50% of its value (house, business, investments) what would my financial situation look like? This might seem extreme… but it happened, for much of the world, less than a decade ago.
- How many months and years will it take me to extinguish my debt, given my annual household budget? Am I comfortable with that?
Certainly, borrowing can help us get where we want to go. But debt can burn out of control, chasing us to places we really don’t want to be.
Written by Ian Collings & Sean Collings