Debt Defines Your Future

And When Your Future Is Defined, Hope Begins To Die. - Kent Nerburn

Japan has over 1900 businesses that are at least 500 years old and is also home to 21 firms older than a millennium. What do Japanese companies have in common? Sustainability. To survive for such a long time, Japanese businesses often employ techniques such as passing down the business through heirs and maintaining zero to low debt levels.

This philosophy of financial sustainability isn't unique to the Japanese. Across different cultures and religions, there's a shared caution about debt's long-term impact. For example, in the Islamic faith, debt is a very serious matter and should be avoided as much as possible, as it is believed debt is attached to your soul after you die. Likewise, across every region in Africa, there are traditional financial systems in place that allow individuals to invest and save money communally to avoid debt.

The success of the world's largest corporations, holding significant cash reserves and low debt, suggests that this ethos has a place not only in traditional practices but also in the highest echelons of modern business.

Photo by Markus Winkler on Unsplash

Welcome back to another installment of the Diaspora Dollars Principles (DDP) series, where we examine personal finance principles. Today, we are exploring debt management.

How does this affect you personally?

We live in a debt-fueled world, sometimes repackaged to us as “credit.”

Credit is the lifeline of modern economies and consumer culture: from buying a home to buying a pair of shoes (consider the Buy Now, Pay Later/subscription phenomenon), anything can be bought using debt.

The Schools of Debt

The discourse around debt is polarized, with one camp advocating for debt as a stepping stone to wealth. Followers of the 'Rich Dad, Poor Dad' philosophy argue that leveraging debt can unlock financial opportunities and investments otherwise out of reach. They view debt as a vehicle to magnify potential returns through channels such as real estate, the stock market, or expanding a business.

Then there’s the school of thought that says you should avoid debt at all costs due to the phenomenon of interest, aka usury. Debt can be a slippery slope, leading to financial instability and stress. This school champions living within one’s means, avoiding debt, and building wealth through savings and investments made with existing capital. This perspective emphasizes the peace of mind that comes from being debt-free and the avoidance of interest payments that accumulate over time.

The Diaspora Dollars Take.

Indeed, there are compelling arguments in favour of credit, as it can enhance economic mobility and opportunities. Yet, our focus is primarily on how credit impacts individuals. The principles of personal finance advocate living within one's means and prioritizing saving and investing. Consequently, avoiding debt is often considered the wisest course of action. From a strictly financial perspective, accruing debt almost always seems like the wrong choice at every level. Moreover, personal finance is rarely strictly financial; rather, philosophy is involved. JL Collins has a great quote on this:

“Life choices are not always about the money, but you should always be clear about the money choice you are making.”

Decisions that appear financial on the surface often encompass additional philosophical considerations. Practically, these decisions translate to obtaining a college degree, owning a nice car, raising a family, and purchasing a home. For many, these goals are inextricably linked with debt—student loans, auto financing, and, most notably, mortgages.

More on mortgages

One of the most significant financial decisions individuals face is choosing between renting and buying a home. This decision is often framed as an investment decision, but at its core, it's truly about managing debt and lifestyle. Buying a home, for many, involves taking on a mortgage—a long-term debt that spans decades- usually one’s entire working life. It locks one into a commitment that, while potentially building equity, restricts financial flexibility. Yet, there are undeniable lifestyle benefits to owning a home:

• Peace of Mind: The security of a permanent place for your family.

• Autonomy: Freedom to customize your living space without landlord restrictions.

• Legacy: The opportunity to leave a tangible asset to your children.

• Forced Savings: A mortgage compels consistent contributions towards building equity.

However, from a strictly financial perspective, renting a home often has the advantage over buying. JL Collins has a fantastic article on this. To summarize his and others arguments on the topic:

• Homeownership costs: Renters are spared the costs of maintenance, repairs, property taxes, insurance, and homeowner association fees.

• Investments: Money that would be tied up in home equity can instead be invested in a diversified portfolio, potentially leading to higher overall returns

  • Historically, the SP500 has consistently outperformed home prices over time.

    • Think about all the news you hear about rising home prices crisis. And yet, the stock market returns more money. If you aren’t yet, what are you waiting for?

• Opportunity Cost: The initial down payment and ongoing costs associated with buying a home could be used for other opportunities that offer better returns.

• Access to Amenities: Renting often includes access to amenities like pools and fitness centers without additional charges, whereas homeowners must pay for installation and maintenance.

• Lower Upfront Costs: No down payment is needed.

• Flexibility: Renters can move without the hassle of selling a property, offering greater flexibility and liquidity, especially for those needing to relocate frequently for work or personal reasons.

• No Risk of Depreciation: Property or neighbourhood value fluctuation does not affect renters.

• Simplicity: Renting is generally more straightforward than buying, with less paperwork and fewer long-term financial commitments.

Now, this isn’t a buy vs. rent piece, but the point is that people cloud their lifestyle decisions by attaching too much importance to costs and credit instead of focusing on other lifestyle factors. In my opinion, people are too willing to take on hundreds of thousands of dollars in debt—with the potential to balloon over time due to interest—in pursuit of societal ideals. They staunchly believe that rent is “throwing money away,” but the abovementioned reasons suggest this belief is not entirely accurate.

Commitment to debt may trap individuals in a cycle of employment focused mainly on repaying that debt, which can restrict their capacity to take risks or engage in entrepreneurial activities. Society often promotes homeownership as it implies steady employment and long-term societal value contribution (and taxes). Consequently, job security and a regular income become highly prized, as they prevent the bank from repossessing one's home. This need for security can deter risk-taking, and the desire or necessity for a larger home may lead to refinancing, further increasing one's debt by hundreds of thousands of dollars.

In the US, Canada, and Australia, a startling percentage of retirees find themselves still burdened by mortgage debt, illustrating the long-term consequences of such financial choices.

"Debt Defines Your Future, And When Your Future Is Defined, Hope Begins To Die." - Kent Nerburn

Home debt is one example of the many types of debt, such as credit card debt, car payments, and student loans. It often feels like we're taught to accept debt as an unavoidable part of life, both on an individual level and for society. While the credit system hasn't fully taken hold in Africa regarding individual credit systems, many African countries have grappled with debt for many years. This is a lesson of particular resonance for Africans and the diaspora: collective fiscal security is necessary for progress. It might be time to consider embracing financial practices from Japan and ancient African traditions, prioritizing sustainability through low or zero debt and communal relationships as the best approach to finance.