It’s pretty amazing what a substantial part of our everyday conversation revolves around debt. Debt issues, deficits and creditworthiness have grabbed national headlines stemming from the downgrade of US debt by S&P and is now a key issue in the presidential candidate debates. At the household level, virtually all of us incur debt of some sort. There’s the notion of “good debt”, “bad debt”, long-term, short-term, the ability to build credit and then the mantra of being debt-free. Everyone’s perspective and financial situation is different but there are some common “personality types” in the debt genre.
Seeking Out Debt -As counter-intuitive as this may seem, smart people and smart companies take on debt even when they don’t have to. With interest rates at lows not seen since World War too, they’ve leveraging up! Why would a company with Billions in cash on their balance sheet be issuing long-term bonds to raise even more capital? For one, it’s free money! With a positive NPV, they might as well issue all the debt they can as long as the market rewards them with an ultra-low interest rate (in many cases, as low as US Treasuries). Next, interest payments are deductible. I know many real estate investors going nuts trying to refinance, buy investment properties and unlock capital at negative real interest rates. So, evidently, not all debt is bad.
Maintaining Current Debt Levels -For many, the prospect of “keeping a tab” is just fine by them. Interestingly, Congress actually finds the notion of just decreasing our annual deficits which is nothing more than taking on “less” debt each year as opposed to actually paying it down seems like a step forward. And even stranger, the market has been rewarding failed attempts to achieve even that with record low interest rates. Why? Many believe that the US will never default on their loans because the economy is just so large and dynamic that within reasonable levels, deficits just don’t matter. The thinking is that as long as we maintain our debt level relative to GDP, we’re fine. Personally, I’m disturbed that the answer is to inflate our way out of it with easy money, but for now, the market’s buying it.
Consolidating -For some, the best way to get out from under the emotional and financial bondage they’ve been enduring for years is to Consolidate Debt. After trying various approaches and seeing nothing put a dent in the barrage of bills, collections calls and mounting interest, this is often the option that changes the trajectory and gives them their lives back. The debt snowball method is a very popular way of paying down debt these days as well.
Avoiding Debt at All Costs – This is the far end of the spectrum. I’ve posted before about the ultra-debt-avoiders and I met another one today. These are people who take a 30 year mortgage and try to pay it off in like 7 years with mortgage pre-payments. Kudos to them – they have discipline! But often times, it becomes kind of like a devout religion and they forsake vacations, social events, normal looking clothes and other things I don’t think I’d want to live without. I guess with the economy being what it is, you can never take your salary or future income for granted. But I also like to have balance in my life. Granted, I think we spend more than we should, but we carry no high-interest debt and I’m saving plenty for retirement, college and a rainy day, so I sleep well at night.
Which Debt Camp Do You Fall Into?