An Interesting Way to View Debt

Happy New Year!! I hope your holidays were both fun and relaxing. But now it’s on to 2016 and all the hope and promise that comes with a new year. I’m not going to do the whole “resolution” thing. We all know we promise to do a lot of things and rarely do very many of them. I Instead, I’m going to share an interesting perspective on something that most, if not all of us, deal with at some point in time. Drumroll please- debt.

The underlying question regarding debt is- is it good or bad to carry debt? Some folks say it’s good because it lets you have what you need or want now as opposed to later. Others say debt is simply the result of people buying what they can’t afford. Still others take a more nuanced view that some debt is good (mortgage, maybe college loans) while other debt is bad (credit card, auto loans). I was flying from Minneapolis back in the fall when I read an article in that colorful if not somewhat generic rag called USA Today that offered up an interesting perspective on debt. I’m going to summarize it, but in the interest of full disclosure I’ll site it here: “Don’t Fear Debt” by Peter Dunn in the Oct. 20, 2015 issue, page 3B.

The basic idea is that there are 3 time periods that we can deal with- past, present and future. The money we earn goes towards one or more of the three. We buy food, gas, pay our utilities, and go on vacation. Those are all present activities. Maybe we put some of our income into an IRA, 401k, 403b, or some other retirement account in hopes of having enough money to achieve “financial freedom”. That is the future.

So where does debt come in? Well, it’s your financial past. It’s spending that you did in the present, but didn’t pay for so now it’s part of your past. For most of us, some portion of our income has to go towards our present since we need to eat. How much certainly varies from household to household depending upon your income and lifestyle. For those deemed living “high on the hog” the number may be quite high- meaning that there may not be much left for the “future” , or even that the past (debt) is growing. Others may be very frugal (or cheap depending upon your perspective), spending little today, carrying no debt, and putting a lot towards the future. Neither perspective is inherently bad or evil, nor is either inherently saintly. The very frugal folks, while typically seen as better or wiser, may in fact be shortchanging themselves of experiences and enjoyment that they could in fact afford without jeopardizing their financial future. As with many things, something in the middle may be the answer.

What happens though when you starting carrying more and more debt? Your income starts to have to be split into 3 streams rather than two. If the debt becomes great enough, it could cut off the stream for the future and maybe even reduce the stream for the present. In this case, you’re sacrificing your future because of your past. This is when debt- all debt- becomes bad.

The author did have one form of debt whose classification was variable- mortgages. Are they past, present, or future? His view was they can be any of the three and may even change over time. In a situation we saw all too often in the Great Recession of 2008, many folks ended up “underwater” in the homes- owing more for the mortgage than the home was worth. That made the mortgage a “past” debt. It wasn’t helping for the future. There are other folks who, while not underwater, will likely never pay off their mortgage before they retire. That is present debt since they’re paying for the place they live. Lastly, for those who plan to and are likely to pay off their mortgage prior to retirement- that’s a contribution to their financial future. Interesting perspective isn’t it.

I don’t know if this is the answer to whether debt is good or bad. What I like is that it’s a way to look at debt in the larger picture of your life. Money only goes to three places- past, present or future. How you structure that cash flow, be it taking on or avoiding debt, or even the lifestyle you maintain now, will affect your financial future. It’s something you can review yourself. Pull out your credit card, bank, and investment statements. Highlight the different entries/expenses- red for those “past” items, yellow for “current” and green for future. How red is your rainbow?