The Truth About Debt and Dreams

debt

Does debt cripple dreams? Or is it the very thing that makes them come true?

My first real experience with debt was a credit card I got back in 2003. I was traveling overseas for 10 months, and a credit card was both a way to access funds whilst away and a safety net for if I ran out of cash. Since it was predominantly a working holiday, for the first 9 months I had little use for the card, and what I did put on the card was quickly paid off from my savings. My last month overseas, though, I was on the road and anyone who has ever been traveling will realize how expensive this is.

Two weeks into that final month my savings ran out. That was a bad time to arrive in Copenhagen, which remains one of the most expensive cities I have been to. Thankfully, though, I had my credit card and those final two weeks of my backpacking adventure went smoothly as I simply added expenses “to the tab”.

Upon returning home to Australia, those last 2 weeks would stay with me for sometime (and not just because of the great memories). I had amassed a sizable debt, and it took me approximately 9 months to pay off my expenses from those 2 weeks. At that time I came to regard credit cards as “nasty little things” that charged excessive interest and were impossible to pay off.

Funnily enough, upon returning home I entered the Banking and Finance industry. The few years I have now spent in this industry – in which I have helped people with everything from credit cards to personal loans to home loans to business loans – have truly been an eye opener into the different ways people use debt and the impact it has on their lives.

The Good

Whilst I came to resent that credit card debt from my last 2 weeks of traveling, the fact is that it saved my skin and allowed me to have fun during a once in a lifetime experience.

Many people come to hate the debt that hangs over their head but, lets face it, many of the large purchases in life – the new car, new house, or new business – would be impossible without being financed by debt. By allowing people to make purchases today that ordinarily they could not afford, debt plays a crucial part in helping dreams come true.

Further to this, many people successfully use debt to make money. For those who know what they are doing, gearing (borrowing to invest) plays a crucial part in magnifying the returns on their investments (it can, of course, also do the opposite).

The Bad

For many people, debt is an experience similar to the one I had trying to pay off my credit card. They feel trapped making the repayments on their loans that seem to be forever accumulating interest and which take a sizeable chunk of their paycheck each week.

How does such a situation arise? There are many reasons, but 3 of the main ones are:

  1. Emergency situations
  2. High housing prices
  3. Uncontrolled material desires

As the above reasons indicate, sometimes there is not much that can done to avoid taking on large amounts of debt. Unfortunately, though, I see too many people overextend themselves. Instead of taking into proper consideration how much they can afford to borrow and still live comfortably, they automatically borrow the maximum amount the bank/ credit union is willing to lend.

What does all this have to do with dreams? Well, when money is scarce it is common for a person to forget their deepest dreams and desires for the more pressing issue of how to make their next mortgage repayment. Also, I’m sure there are many people who feel trapped in certain careers because they need to continue earning a certain income to service their debt.

The Truth

So to return to my original questions, does debt cripple dreams? Or is it the very thing that makes them come true?

The truth of the matter is this: debt itself is neither good nor bad. It is the way in which a person uses debt that is good or bad. Debt can help you turn a dream into reality, whether that dream is a new car, a new house, a new business, or an overseas adventure. If, however, you do not use debt wisely then it is likely you will come to feel trapped by it.

The Key

In my mind, the key is using debt wisely is this: personal responsibility. This, in my opinion, has 2 elements:

  1. Financial intelligence: unfortunately schools don’t teach financial intelligence. It is therefore up to you to take personal responsibility for your own financial education. Building your financial intelligence is crucial in ensuring you use debt wisely.
  2. Controlled spending: this means living within your means and limiting your materialistic desires to what you can comfortably afford.

So to sum up, it is possible for debt to play a positive part in your life by helping your dreams become reality. It is, however, your responsibility to ensure this happens.

Photo by Images Money


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9 thoughts on “The Truth About Debt and Dreams”

  1. Nicely stated. When I was a Consumer Credit Counselor, one of the most shocking things I could say to a client was that credit cards are not bad. But I meant it — the only danger of credit cards is that they can very easily be misused. Unfortunately, people often begin to treat them as a reserve savings account, and have no plan or intention of paying it back. And, of course, that’s when the trouble begins. A great article!

  2. Thanks Aaron. Yes, credit cards are no longer “nasty little things” to me. Now that I understand how they work, I never pay any interest and they are just a convenient way to use my funds. Plus they are there as a potential source of quick cash in emergency situations.

  3. I learned to curb my credit card use by my Mom. She gave me a credit card when I was in college for “emergencies”, but I would be abusing it at times. For example, I took cash out from the card, not knowing the interest accumulated as soon as I withdrawn the cash. Not good. She gave me an earful and a really bad guilt trip. Needless to say, I didn’t do it again.

    Good article, Peter.

  4. Thanks Todd and Rudy.
    Rudy, I have seen a lot of people get stung by the interest and fees associated with cash advances from a credit card. It’s a good thing you learned a lesson from the experience, many people don’t.

  5. Thats exactly right, debt or credit cards by themselves are not “good” or “bad”, its how you use them. Some of the most successful business people (esp. in real estate) use debt to build wealth. Really good article Peter!

  6. My husband and I have never borrowed money to buy a car, and we’re still happy living in an apartment. We save money ahead of time and use credit cards for convenience, but we never pay interest. It’s mainly a matter of patience and being willing to live below your means in the beginning.

    We were lucky enough to live and travel in Europe and go around the world on money we had saved ahead of time. At the time the exchange rate was in our favor, which is no doubt showing my age!

    About going into debt to make one’s fortune. It works for some people, but a lot of people are getting burned by the recent real estate slump. It would be interesting to see how many people win big, make a little or break even, or lose a lot by taking that risk.

  7. If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership’s lot and it’s downhill from there. Too many people shrug off a car payment as a necessary evil.

  8. What EXACTLY is the ‘American dream’? Is it the owning of property? The ability to consume all one wants? Or is it what the founding fathers intended, a country where everyone (and yes, I know they were male chauvinists who saw blacks as less than human) could pursue their desires for debt relief in Ohio state, to worship whomever as they saw fit, and seek their own version of happiness?

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