MONEYWISE

The deceptively deceitful allure of debt

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Debt is easy money. A lump sum payment, upfront cash, easy to justify, easy to spend. Trouble is, what you bought with it, is not yours, not until you pay the cash back.

Personal debt is a personal burden. No matter the financial circumstances or the persuasive asset acquired, the decision to borrow money is an emotional and mental strain. You are not your own complete person when someone else can control your lifestyle.

Corporate debt is a common business strategy to leverage the assets, products, and employees of an organisation for efficient cash flow, profits and acceleration of future growth. Measured corporate borrowing generates offshoot products: investments such as commercial paper, money market and bond mutual funds, components of millions of investment portfolios.

Government Debt is financial slavery. It has no selective cultural boundaries. Some, but not all, will share in government largesse through social benefit programs. Everyone shares in the repayment pain. Everyone.

Debt is never an investment in the future, no matter how eloquently stated, or how firmly the belief is held. Instead, debt resembles a giant poker game bet with all moves predicated on future performance. Debt is borrowing money with a promise to pay the principal sum back with interest to the lender because who in their right mind would lend cash to receive the same amount back years later. The future promise, even in contract form, is an intangible, given that the real assumption, always uncertain but little recognized, is that there will be a job, a revenue generation for profits, taxes, tariffs and the like to support the repayment of principal and interest.

Debt has to be a means to an end, not an end in itself, as in the use of short term debt to meet cash flow shortages. Where is the capital asset there? Long-term debt is, and should be used to purchase assets that will appreciate over time, long after the debt is repaid.

Borrow the amount of debt that you can safely cover, even in bad financial times. What is dangerous here, even with the use of good debt for appreciating assets, is the inability to understand that debt must have a ceiling beyond which the borrower cannot trespass. Otherwise, at the mere hint of hardship or a reduced income stream, there will be little to no ability to meet debt payments. It is too easy when times are booming to feel confident that your compensation scale will always be the same or better. In a competitive global economy, there is no such thing as always.

A few of the many kinds of debt. Plain unadorned long-term fixed rate debt repaid in an amortisation schedule over time is well known to most goal-focused individuals.

Leveraged debt, one of the worst types of debt there is for the small investor, is called by any other name but borrowing. CDO, subprime, margin accounts, credit enhancers these are all terms used by the investment industry to describe borrowing against securitised assets, or in uncollateralised form to increase yield and capital gains.

Credit card debt the second worst lifestyle enhancer is borrowing from others to live beyond one’s means and on borrowed time. Credit cards carry the highest rates of interest, while Credit card debt purchases generally never represent appreciating assets. Unfortunately, many are using credit cards for treats, food, and trips. That cute bag you bought may take five years to pay off, long after you are interested in displaying it at your job.

Ever look at the back pages of a credit card bill? Almost no one reads the four pages of fine print in the debt encumbrance section. Credit card companies will take your first born child in their relentless pursuit of repayment. Why shouldn’t they want to be repaid? You’ve had a high old time dining out, picking out that special designer bag, traveling, or acquiring more electronic gadgets. Credit card companies sell successful lifestyle with their soothing media message of how to acquire the finer things in life with no money down. They know that even with thousands of debt defaulters they are turning great profits.

And no wonder, are you ready for this instead of feeling stressed about owing all that money, many students actually feel “empowered,” according to a new study from Ohio State University, based on data collected for the federal Bureau of Labour Statistics. The study, published in the journal Social Science Research, surveyed 3,079 students, the majority of whom were in their early-to-mid-20s.

That’s right. The more college loans and credit-card debt that young adults 18 to 27 have, the higher their self-esteem and the more control they feel they have over their lives. Source: http://bucks.blogs.nytimes.com/2011/06/15/college-students-surprising-attitude-toward-debt/

I am incredulous.

In the final analysis, conscientious, seriously committed, ethical people will use debt very, very carefully. To purchase an appreciating asset with well established planned long-term growth. They will conscientiously commit to repaying that debt until they truly take ownership.

Others are crassly careless with the use of OPM other people’s money. Debt to them is the same as cash, their cash, not anyone else’s cash. They feel entitled to have what everyone else is perceived to have. Debt becomes a game to see how much can be leveraged without any responsibility for repayment.

And, when they’ve had enough, splurged enough, or acquired enough (this impulse is never curbed in those careless with other people’s money), they walk away from the debt, and the commitment to repay. After all, it isn’t their money, so why should they pay it back!

Guess who picks up the tab again? The rest of us, those ordinary responsible citizens, the ones the ultra social climbers look down on, the middle class that does the right thing, working, saving, voting, living life by actions applied responsibily. The middle class that represent the back bone of the country, once again, get to shoulder this collective country debt, along with our own personal loans - for the rest of our lives.

We have to get our debt under control. The Government is using us, the people, as a revolving credit card machine. Pray, tell me how that is an investment in our country?

Good viewing material: ‘Inside Job’, the Oscar-winning documentary on the subprime mortgage crisis, is an excellent film to watch for further understanding of what really happened with the subprime mortgage investment meltdown.

Martha Myron, JP CPA CFP(US) TEP is an international Certified Financial Planner™ practitioner in private wealth management. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with United States and multi-national connections, and US citizens living and working abroad. She is a Masters in Law candidate in International Tax and Financial Planning and the Bermuda country contact at the American Citizens Abroad Tax Advisory Council. www.americansabroad.org For more information, contact 296-3528 at Patterson Partners Ltd.

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Published Jul 23, 2011 at 12:01 am (Updated Jul 22, 2011 at 8:01 pm)

MONEYWISE

The deceptively deceitful allure of debt

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