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I wrote many years ago, in a brief moment of trying to write silly things about money, that debt may have ruined more lives than some drugs, but drugs are illegal and debt is tax deductible.
Kind of crazy when you think about it.
And look, I am not a debt zealot.
I think debt can be a wonderful thing and plays a wonderful role in society and can be used responsibly by people and companies and governments.
I'm not anti-debt at all but like all good things, it can be taken way too far and very easy to ignore and not understand the dangers and the downsides of what you're using.
And of course that is the long, thousands of years history with.
And so today I just want to talk a little bit about the philosophy of how I think about debt.
And the reason I wanted to put this together is because it is so often among laypeople and financial professionals that when they talk about debt, they hone in like a laser beam on one statistic, and that is the interest rate.
How much does the debt cost?
Is it a cheap mortgage?
Is it expensive credit card debt?
They look at the cost of the debt in terms of the interest rate.
Of course, that's a component of how I think about debt.
But there's so much more to the actual cost of debt, the psychological cost and the cost of getting kind of kicked out of the game, as I'll explain in a second.
So this is how I think about debt.
Japan has 140 businesses that are at least 500 years old.
There are a few businesses in Japan that claim to have been operating nonstop, continuously for more than a thousand years.
Pretty wild.
And it's astounding to think about what these businesses have endured over those many centuries.
Dozens of wars and emperors and catastrophic earthquakes and tsunamis and depressions, and on and on endlessly.
And yet these businesses just keep selling.
They keep staying in business generation after generation.
Studies of these businesses that have been alive for hundreds, if not thousands, of years tend to show that they have a common characteristic, which is that they hold lots and lots of cash and no debt.
And that is at least part of how they endure for centuries amid constant calamities.
I love this quote from the author Kent Nurburne that says, debt defines your future.
And when your future is defined, hope begins to die.
Not only does hope begin to die, but the number of outcomes that you can endure does as well.
Here's how I like to think about debt.
Picture A long squiggly line.
It almost looks like a stock chart of volatility.
Up and down and up and down and up and down at random times.
Maybe it's kind of like an EKG chart, you know.
That I think, let's picture that as the volatility of your life.
Not just in the stock market or the economy, but volatility in your life.
It can be, yes, recessions, but wars, divorces, illness, moves, floods, changing your mind.
That is the volatility of your life.
Now, if you don't have any debt, if you are debt-free, then the number of volatile events that you can withstand throughout your life has a range in it.
So think about that stock chart, the squiggly line stock chart again.
Imagine there's like a channel.
There's a line above and a line below the stock chart and everything within that channel.
You can endure.
You can survive.
Now if you have no debt.
There might be some big events in your life that would push you over the edge.
Maybe it's a long-term job loss or a divorce or a long-term medical illness.
There's some volatility that you will not be able to withstand, even with no debt.
But that channel is pretty wide.
The range of outcomes that you can endure is very broad, very wide.
But then if you have a little bit of debt, that channel starts to narrow.
And now, amid the volatility of your life, there are some events that you cannot endure anymore, that push you over the edge.
So when you had no debt, maybe you could endure a job loss of six months, let's say.
But now if you have a little bit of debt, maybe that shrinks to four months or three months.
And so now the range of volatility in your life narrows.
And then if you have a lot of debt, it shrinks even more.
And now?
Maybe a short-term medical illness will throw you over the edge, or Moving might be out of the question, because you can't afford that amount of volatility in your life.
And you have lots of debt, lots of credit card debt, or a country has lots of debt, a business has lots of debt.
The range of volatility that you can endure in life shrinks dramatically.
The channel around that squiggly line of volatility in your life is very, very narrow.
And the slightest bit of volatility now throws you over the edge.
And this is, I think, the most practical way to think about debt.
As debt increases, you narrow the range of outcomes that you can endure in life.
Now, think about what I just said there.
I didn't say anything about the interest rate and say anything about the cost of debt or the cost of capital or anything else you would learn in a finance class.
As debt increases, you narrow the range of outcomes that you can endure in life.
That, I think, is the most practical way to think about debt.
It's so simple, but it is so different from how debt is typically viewed, which is just a tool to pull forward demand and leverage your assets, where the only downside is the interest rate.
That's how most people think about it.
And two things are important when you view debt, as I do, as a narrowing of endurable outcomes.
Number one is you start to ponder how common volatility is.
So I hope to be around for another 50 years.
Maybe that's crossing my fingers, but that would be great.
And what are the odds that, over the next 50 years that I hope to be around and a citizen and a human, that I will experience one or more of the following?
Wars recessions, terrorist attacks pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children.
What are the odds that I will experience at least one of those?
And I would propose that the odds are 100%.
Not 98%.
They are 100% that I will experience at least one of those.
And that's true for you, too.
It's true for everybody.
Life is very volatile.
It's extremely volatile in ways that are unforeseen and ways that we don't want to think about.
And that is why, when debt narrows the range of outcomes and volatility that you can endure, you get a problem in your life.
And when you think of it like that, then you take debt's narrowing of survivable outcomes very seriously.
The other thing you think about here are the kinds of volatile events that could do you in, that could set you over the edge.
Financial volatility is an obvious one here.
You find yourself unable to make your debt payments.
You have too much debt and you are now bankrupt, let's say.
But there's also what I would call psychological volatility where, for whatever reason, you can't mentally endure your job any longer.
Or there's family volatility, which can be anything from divorce to having to care for a relative.
There is child volatility, which you could fill a book with that topic of the ways that your children can go wayward, go astray.
Health volatility, political volatility.
We're dealing with that right now.
On and on.
The world is a very wild place.
And so again, don't get me wrong, I am not an anti-debt zealot.
If you have some debt, mortgage, student loan, probably not a problem.
Okay.
There's a time and a place for it, and it can be used responsibly as a wonderful tool.
But once you view debt as a narrowing of what you can endure in a volatile world, you start to see it as a constraint on the asset that matters most, which I think is having options and flexibility.
That's it for this episode.
Thanks again for listening, and we'll see you next time.
