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Dr. Kalinda Rose Stevenson
The Gifts of Debt
Welcome back!
Debt is both a curse and a gift. Debt can ruin you. Debt can also set you free to create a life of abundance. How is it possible that debt can have such different effects?
In the theaters of ancient Greece, actors wore masks to represent tragedy or comedy. Debt also wears two masks. One face is familiar to us. It kicks us when we are down, squeezes us when we are broke, hounds us when we can’t pay. It doesn’t take much imagination to recognize this face of debt. This type of debt robs people of their lives. This debt can and does ruin people.
This face of debt is particularly acute at this time of year. January is the month when many people open up credit card bills and wonder how they will pay for the Christmas gifts they bought on credit. It doesn’t take much imagination to outline all of the ways that debt can ruin lives.
Yet, debt has another face. This face of debt can be a great gift to those who recognize it and use it well. Why? Debt allows you to take advantage of someone else’s money to buy something you could not afford to buy. Debt allows you to do and be and have what you could not do on your own.
Let’s start with mortgages for houses. Few people can afford to buy houses with their own money. You can probably buy a cartload of groceries, a meal at a nice restaurant, and some new clothes by pulling cash out of your wallet. But when you want to buy a house, how many people have enough money in their checking accounts to be able to buy houses for hundreds of thousands of dollars?
What is the solution? You take out a mortgage. A mortgage is a just a fancy word for debt. You borrow money to buy your house. And because of this mortgage debt, you have a house you can call your own.
What else does debt give you? Debt puts college in reach for millions of people who could not afford to pay tuition up front.
Debt also allows you to start a business, using someone else’s money, when you don’t have enough money of your own.
I can imagine that you might be thinking: Banks and lenders are making a profit on all of this debt. And besides, you are paying dearly to borrow the money. What about the interest rates? What about the endless fees? What about the banks that overcharge? All of this true. Banks and credit card companies can be downright usurious in their charges, especially for anyone who gets in trouble and falls behind in payments.
And it is also true that debt can be a great gift because it gives you a start. You borrow money to buy a house you could not afford to buy without it. You borrow money to start a business when you don’t have enough to get started. You start school you could not have started without the borrowed money. These are only a few examples of the gifts of debt.
Consider this. The only reason you have debt is because someone with money believes that you will repay the money. And with the money, you are able to do something you could not otherwise afford that will change your life for the better.
Debt has two faces. You can also choose what face you will wear in front of debt. You can wear the face of fear. You can be angry at your creditors and upset with yourself, or you can put on the face of gratitude that someone trusted you enough to loan you money for you to have and create and be what you could not have or create or be with your own money.
Abundance comes in many forms. One source of abundance in your life comes in the form of credit from people and businesses. This face of debt can be a great gift on the pathway to living abundant lives. The most appropriate response is gratitude for the gift of debt that leads to abundance.
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When Good Debts Go Bad
One of the most powerful ways to create financial abundance is to take on good debt. Good debt is money you borrow to finance investments. Good debt allows you to leverage OPM (other people’s money) to create wealth. Bad debt refers to money borrowed to buy something that will not bring a return on investment. My goal this week is to make the case that even good debts can go bad.
A good debt turns into a bad debt when you borrow money to invest and don’t make a return. In the worst situation, you even lose the borrowed money.
Are there any predictable reasons why good debts turn into bad ones?
One fundamental reason good debts go bad concerns timing. You invested borrowed money at the wrong time. Or you kept the borrowed money in the investment too long.
“In the real estate jungle, timing and strategy are the redwoods; everything else is a bonsai”.
Robert Campbell
Perhaps the most common piece of investing wisdom is to buy low and sell high. Whether it is the stock market, real estate, or another type of market, the ideal investment is to buy at a low price and sell at a high price. By following this strategy, you get the most return for your investment.
As with so many wise sayings, the concept is clear enough. The challenge is to be able to predict the high points and the low points.
“In the business world, the rearview mirror is always clearer than the windshield.”
Warren Buffett
I have been to several stock market courses, learning to read technical charts. It’s always easy to see trends when you are looking at the past. You can see the high points and the low points. It’s easy to identify exactly the right strategy for the situation when you are looking at what has already occurred.
Last week, I heard a fascinating talk about timing the real estate market. The speaker used charts and indicators to speak about California real estate. I live in the San Francisco Bay Area, where real estate prices have gone up and up and up and up. For several years, commentators have warned that prices are artificially high. They keep declaring, “At any moment, the bubble will burst and prices will drop.” Yet, despite these warnings, the prices keep going higher and higher.
Alan Greenspan made the same kinds of statements about the financial markets in the late nineties. He spoke of “irrational exuberance” driving up the prices of overvalued stocks long before the market bubble burst.
“Trends never end. They Only Change Direction.”
Robert Campbell
One of my favorite concepts is the “Law of Undulation.” C. S. Lewis originated the phrase in his book, The Screwtape Letters. The Law of Undulation means that everything and everyone operate in wave-like patterns of up and down and back and forth. Nothing stays the same and nothing operates in a straight line.
Lewis uses the Law of Undulation to claim that human beings tend to assume that the current situation will continue, no matter what the current situation is. Lewis speaks of the natural peaks and valleys of life, the emotional highs and lows. Yet when we’re down, we assume that we’ll always be down. When we’re up, we assume that we’ll always be up.
Despite the fact that everything in our natures and the nature of the world runs in wave-like cycles, our typical human inclination is to think that our lives are lived in straight lines. When we live with straight line attitudes in a cyclic universe, we don’t recognize the signs and signals that things are about to change.
Real estate markets also operate according to the universal Law of Undulation, with property values rising and falling at different times in different markets. Yet in hot real estate markets, it is easy to fall into the straight line trap and think that the prices will continue to rise indefinitely.
“Spotting the peaks and valleys of real estate cycles has always been the dream of both buyers and sellers. With the cyclical nature of the market, good times come and good times go, and then good times reappear again. The challenge for intelligent decision makers is to look for ways to profit from changing market trends, rather than just sitting back and – good or bad – passively accepting them.”
Robert Campbell
No one has an infallible crystal ball. You cannot predict with absolute certainty the results of any investment decision you make. However, you can improve the chances of your success considerably by understanding that change is the only constant. Ebbs and flows and ups and downs are the way of the world.
Good debts go bad when you don’t pay attention to trends and miss the signs that the trend has changed. Or worse, when you recognize that the trend has changed, but you hold on with the hope that the price will go up again.
This article was originally published January 25, 2005
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http://www.abundantlyalivenow.com/archive/AANN-2005-01-25.htm
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