Tag Archives: borrowing

Freedom vs. debt and the dangers of financial heroin

You want freedom? Then have no debt.

It is that simple.

Your level of freedom is inversely linked to your level of debt. As one goes up, the other goes down.

Every time. No exceptions.

This applies for individuals, start-ups, big or small companies and countries.

Greece is losing control of its economy and its freedom because it has unmanageable debt.

People across the world are losing homes because they cannot pay their bills and their debts continue to grow.

Small businesses close daily as banks close credit lines, refuse loans and change credit terms at will.

The message is clear – all the time you are in debt you restrict your freedom.

High debt levels = less freedom, regardless of who or what you are.

Once the lender loses his confidence in your ability to pay (e.g. Greece) you have no choice to do what they want. You might think you do. You don’t. Defaulting on debt is the start of a ride down a very nasty razor-blade coated slide.

You do what they say or suffer the consequences. Pain either way.

Instead of teachings kids about buying things, supporting rabid consumerism and teaching about brands, we should teach about independence and personal security. We should teach why happiness is not buying lots of things but the opposite, buying what you need and buying what matters. I’m not going all Buddhist on you – as you may be happy with products bought on debt, but you will not be secure. If Maslow was right, then you need to get the security bit right before the buying a new TV bit right.

We should teach kids how finance works. How banks make money and how people lose their homes.

I don’t mean at 16, I mean at age 7. Get the basics in at the start.

We should teach teenagers why payday loans with APR rates in the thousands are pure evil. They are. There is no debate on this. They are predatory and evil. They are financial heroin. It may solve a gap in your life, provide some quick fix, but extended use will screw up your life.

We should teach business studies graduates to admire and respect stable businesses, with positive cash flows, able to suffer business cycles rather than go begging to bankers (or more likely go bust). Building business quickly is good, but there are different ways to do this. Borrowing money, whether from a bank, from Venture Capitalists (VC) or from your parents reduces your freedom to make decisions. Whilst a VC may take a less active role, they will often have a final decision on major choices that you have. This continues through to shareholders. Go public, get the cash, but lose control. You are no longer in control of the ship. Business schools teach the parable of the person who built his company, took it public only to be ousted. Look to Steve Jobs for a pretty recent case of this.

How did Steve avoid this when he returned?

He kept control and kept control of the cash. Sensible investment, never risking the security of himself or the company.

Whether you are a person, a business or a country, the message is the same:

The more you borrow, the less freedom you have.

Freedom may not matter in these terms, but if we use some other terms such as choice, liberty, security, then they should matter.

For a person, you may think this is restricting what you can buy. It isn’t. It is restricting you on being able to leave a job that you hate. It restricts you from taking that trip of a lifelime. It restricts you from retiring, from taking extended time off, from giving to what you care about. It is in these terms that we need to focus, not on new cars, big TVs and short extravagant holidays paid for on plastic.

The paradox of course is that the more you spend on these things paid for by debt, the less freedom you have.

Again, it is the same with businesses. Forced to deliver earnings to meet quarterly shareholder and analyst expectations, many companies are unable to make the changes, investments and shifts that would secure the long term future of their company. Just as the individual focusing on the short term risks their long term security, so does the company. Being beholden to shareholders who demand predictable and regular quarterly results is no more fun for the CEO than it is for the individual working in a job they hate to meet the credit card bills for the products they have long forgotten about, worn out or discarded.

So a piece of advice for the next time you want to buy something using debt, ask yourself.

‘What is the true price I am paying for this? Not the cost, but the price in terms of loss of freedom?’

This is Part 1 of a 2 part Series.

Part 2: Freedom, education and the failure of politicians