Episode 042 - Debt is not a currency
The one rule that I think everyone agrees to - whether you are Suzie Orman or a FIRE advocate, is that you CANNOT retire with any debt. When we use the term “debt” we are referring to personal debt - I’m not talking about holding debt for income producing assets like real estate. But with this generally accepted rule, why is it that everyone is being hypnotized to think of debt as a currency?
Click on the player above to listen to the episode or download it. You can subscribe to the RSS Feed here.
Your freedom is at risk of being stolen from you. Your willingness to take on debt is poison, and you need to resist it at all levels.
Economic ups and downs happen. It is how you react to BOTH the Up and Down periods that determines your freedom.
If things are good and you have good income, if you sell the future of that income generation out to a bank, you are willingly agreeing to be a slave.
If this are bad and you don’t have any form of emergency savings or your own asset value, and you elect to borrow your way through the cashflow needs, you are willingly agreeing to be a slave.
Remember 90% of all small business failures didn’t come from the business not making a profit. It came from cashflow issues - the business had to pay salaries, rent, suppliers, taxes, etc. and it didn’t have the money to do it. So what did they do? They got a “line of credit” with a bank to get them through the moment, rather than taking the profits they had previously made and creating a “float” that would cover them in case of any business interruption for the future.
I get asked by a number of listeners about what they should do with their cash while waiting for assets (like real estate) to become bargains. Well, the first thing you should do is to make sure you have protected your future with some emergency fund that can handle a situation where you were out of work for 6 months. If you have that covered, then we can begin the conversation about where to invest, but if you don’t, and you haven’t paid off all of your debts, you are vulnerable. There’s one thing to benefit from rising investment yields, but another thing to be a victim to cashflow.
I am trying to bring back the glamor of the “old times” here. When people made money, saved it and got through the hard times. You have probably heard me referring to the natural Ying-Yang of the universe. That things must cycle to keep balance. There is one guarantee that you can make here - if things are good today, they will be bad tomorrow. And the contrarian knows that, and we live in a world of opposites. When everyone is panicking about the looming depression, we buy things. When people are celebrating the good times, we sell things. That opposite approach yields 100x more than the herd mentality of doing what everyone else is doing.
So back to debt.
Why is it that at all levels we are told that debt is just dandy. Let’s look at where these messages come from and how we have to deal with them:
You probably see interest rates being advertised as low. Mortgage rates, as I write this, are at the lowest levels in history. I think today’s rate was somewhere around 3.15% for a 30 year traditional mortgage in the USA. Everyone is rushing to the banks to refinance their debt or buy a new home (probably a bigger place) because the cost of funds is so low. Of course they are factoring in the massive fees that the banks will charge to do the loan, and further reducing their equity and increasing their debt load. But they are only focused on the 3.15% and locking in that great rate.
Let’s destroy this. Why do you have debt in the first place? You wanted a safe and secure home to live in, raise your family, etc. You wanted to get “on the property ladder”. You wanted to see the increase in asset value that real estate typically gets. But the reality is that you sold your future out for 30 years of having a job to pay the home off. 30 years. For the average American US male, that is just under half of the term of your natural life. You sold off half of your life to a job because of that mortgage. Are you crazy?
But why is it that most of us in the middle class, western world, have accepted this stupidity? Because we need stability and want a home. OK, but if you knew that beforehand, why didn’t you prepare for this? Why not buy a fixer-upper with 50% down payment first, live in it for a while, then sell it for a profit and do it again, thereby reducing your debt load? If you do that on an accelerated level, you would have NO mortgage in five years or so. Is that not a better strategy?
The same argument could be made for a car. Now I believe that since a car is a naturally depreciating asset that needs constant maintenance, an argument can be made for not owning it. In many cases, a lease makes more sense. Since it is a 2 or 3 year commitment, it may be short enough to give you some flexibility. But the ideal scenario is that you pay cash for a car, learn to maintain and fix it yourself and agree to hold it for at least 10 years, if not more. The money you save that isn’t going out the door to fund interest or lease payments, can be invested and/or used to prepare for the next car later on.
Credit cards are evil (even with travel points)
Full disclosure - I have never spend $1 on an airline ticket for me or my family for the past 6 years or so. I travel all over the world, and spend (normally) about 40% of my year abroad, and never pay for airline tickets, hotels, etc. How? I use reward points on credit cards.
So with that statement, how can I say that credit cards are evil? Because I don’t use credit cards like they are supposed to be used. I’m the absolute worst customer for a bank in that regard. I use credit cards like a refill account. And each month, for each card, they are paid off 100% BEFORE the statement arrives. I do this by having enough liquidity in a bank account to counter the credit card values. This way I pay no interest or fees.
But for 95% of US society, they don’t do this. They will use a credit card for “convenience” and when they get the statement (after the interest has been charged), they will pay some portion of it. The vast majority will never pay it off. They will make either minimum payments, or something just a bit higher yet the next month’s bills at the grocery store or the cable bill or the phone bill, etc. will just get charged to the card. This is madness.
If you have the money, then spend YOUR money. Not someone elses. Then you don’t get charged a fee. Think of it this way - if the credit card bill charges 15% on your charges (and they probably charge more), where could you get 15% return on your savings these days? Well simple - use the card to get the points, and pay the damn thing off immediately. There you go. Free airline tickets, free hotels, etc. And you are SAVING 15% on your money. Remember it isn’t what you earn - it is what you keep.
And if money burns a hole in your pocket, immediately go and cut up all your credit cards. You don’t have the discipline to have these and you shouldn’t have these. This is a loaded weapon that will backfire on you. So don’t fall into that trap.
And no - you don’t have to think of yourself as a loser because you don’t have the latest AMEX card or Chase card or whatever. Those ads that portray the debt laden holders of those cars as “beautiful people” are lying to you.
At the risk of sounding like I’m not a proud flag waving ‘Murican, we have to get real with our government and their mismanagement of our future.
Rather that creating a country of productive producers of things, we have become a country of consumption. The big money is made when $USD flows through the pipes, so that some bankster can syphon off a piece of the income flow. These financial service fees represent over 40% of the US GDP - meaning that it isn’t “GROSS DOMESTIC PRODUCT” but it is more like “GROSS EXTORTED PROFIT”. We are being taken for a ride here with every transaction that involves $USD at any meaningful level.
You buy something at a store or online, and the merchant is paying 2-5% in credit card processing fees just to receive your money. And when a country sends money to another country through the SWIFT network, the funds move through New York and fees are syphoned off for that too. It is not surprising that a large portion of the world population are living in abject poverty because they can’t afford the entry ticket to this money maze.
But even with this all going on, our very own “Federal Reserve” is a private cartel of private banks. It is NOT our government. They operate in secret, they control the purse strings and they control the well-being of our country and set the tone for the rest of the world. They run the IMF and determine the rate of interest that countries can borrow at to raise the living standards of their people. But rather than educating their people to raise their own living standards, most governments act not as the “provider of last resort” but as the “provider of all resorts”. Those that do not, get corrupted by corporate opportunists that manipulate policy for their own interests - knowing that they need workers in order to generate profits that don’t go back to the government in any meaningful way, but are distributed to shareholders. So you can draw a direct line from the low income wage earner, making the shareholder richer here, with the blessing of the government.
And when that low income wage earner falls on hard times, and has the least ability to support themselves, they go to the provider of last resort - the government and file for unemployment, or get some stimulus if too many are affected at the same time by the same calamity. Meanwhile the government is borrowing money from the private banker cartel (the Federal Reserve) who has been given license to create that money from nothing, with no solid backing, thereby injecting more money into the money supply, and reducing the value of the existing money already in circulation.
They tell us lies about inflation rates, employment rates, etc. because they don’t want to disrupt this heist. That’s the crime - the inflation rates specifically do not include line items like healthcare while most Americans are paying (either directly or indirectly through their employer) as much as their mortgage payment each month for health insurance that may or may not be there for them when they need it. Yet these payments never are counted in the inflation rates or cost of living rates, that the bankers use to set interest rates.
So our government meanders down a road of perpetual borrowing. We go from $1 trillion in debt to $5, to $10 to $20 to $30 and beyond. All the while we know that the government made a social contract with its citizens to be there for them with money when they retire (social security) or with healthcare (Medicare) so that they were not voted out of office. This model is not sustainable. It would not be for you, and it isn’t for them. But rather that admit defeat, they just perpetuate the same lies and spin so that you don’t think about it.
I mean isn’t it better to have nice roads without potholes, trash collected, schools, fire departments, etc. and live in a “nice neighborhood” than to live in a more challenged place in countries that don’t have this massive debt load? I’ll tell you this - it is the government equivalent of what we say in the recording business, “Polishing a turd”. Don’t every try and peel back the outer layer and see what lies beneath it, because it is scary.
And no - you should not operate your personal finances like the US government does. They are not setting a standard that you should aspire to.
But I don’t make any interest on my savings
This one I hear a lot. It seems to most people that economics is a True/False type argument. Either you have assets or you are in debt. It is nothing like that, yet few would understand it.
Let’s break this down a little. First and most important thing - you need cashflow to survive. Cashflow is money you use on a daily basis to survive. If you keep your burn rate low, you don’t need that much cashflow. If not, you need a lot of it. Cashflow comes from either direct labor (ie. a wage for you selling your time to someone), or from dividends or income produced from assets you own (we call that Smart income). You need to have an abundance of cashflow - more than your expenses. The overage of cashflow here is called “profit” and that is what you save & invest.
Those that live frugally have more profit. Those that don’t have less. Profit provides you with a backup plan to have capital when your cashflow is interrupted. If you are a business owner you know that cashflow cannot be guaranteed and often cannot be predicted. Therefore you hunker down a lot. Or you at least open up lines of credit with banks to get you through the down months. The lack of cashflow puts businesses out of business. But you, on a personal level, have to be your own bank.
If you think that holding back on work or spending money on things you don’t need with credit is the way to have a good life, you are mistaken. A good life is a life unconstrained. A debt laden life is the polar opposite of that. Debt is evil and should be avoided at all costs. So your need to save is heightened and you must have access to liquidity to get through your cashflow needs until the cashflow interruption is overcome.
So what do you do with your profits? First thing, pay off any debt. 100% pay it off. Second thing, have an emergency savings fund of liquid cash ready to cover you for upcoming cashflow disruption.
Then what is left after that is your investible capital.
Where do I put that money? If banks are not paying anything in interest where do I put it? Stock market? Bonds? Where?
There’s a theme here you can probably tell by now. Banks are evil. Banks don’t want to pay you for your money. Banks want you to pay them for theirs. So don’t give it to banks. Stock markets are casinos. You might do ok, you might lose your shirt. Know that there are no guarantees and timing is everything. For me, that is a bridge too far.
First look at where your costs are coming from in your burn rate and find ways to invest in yourself to reduce those ongoing costs. Look to your energy bills, water usage, food, etc. Invest in your own home to improve it. Invest in technology that uses nature to create the things you need in life - solar power, organic farming, etc.
Once that is done, then what? Well I’m a firm believer that you should get your money out of the USA. Why? Because if you look to the government mismanagement of the economy, your money is at risk of seizure. The concept of a bail-in is not a distant possibility, but a real one if there is more continuation of this spend money we don’t have model and 2020 is one of the worst years in history of spending money we don’t have. The concept of stimulus to avoid an economic collapse is just another way to pretend away that the idea of living in total debt, or to embrace debt as a currency, is bad from the start.
Did you know that banks outside of the USA pay actually decent interest rates? Consider that banks in Mexico pay 3-4% interest on savings accounts. Or in Georgia, they pay upwards of 8%. Countries that don’t embrace the idea of massive debt loads, and don’t live on credit, typically reward savers for their money. Now with that, US persons are at a disadvantage in opening foreign bank accounts, but it is not impossible. You need to understand FINCEN and FATCA laws in regards to this, but finding a solid and reputable bank outside of the USA may be the answer to a lower risk way to get interest on your money, as long as you can cover the costs of accounting and tax attorneys here to handle the filing requirements here.
The other option, if you are looking for long term strategy, is to invest in counter assets that go against the normal $USD position. I’m talking of Gold or Silver for the most part. Those assets benefit when the $USD is hurt. And with the massive generate of new $USD, the money can’t survive forever. So those that invest in gold are doing it as “dynastic wealth” - that is money for the future that should do pretty well against the $USD.
Now like anything, you can have a bet each way. You might want to put a percentage of your assets into Wall Street stock market investments. Maybe a percentage in gold and silver. Maybe a percentage in offshore investments. Maybe a percentage in rental real estate to get the rental dividends from that.
Here’s another idea... This is all good if you want to generate or keep wealth. But what good is money if you are living like a virtual slave? If you can’t move, or can’t speak freely or can’t escape the clutches of massive taxes to pay for government mismanagement, what good is having a lot of money? Can you buy yourself out of this mess? Unlikely.
So my advice to people that have money, after all of their debts are paid off and they have their cashflow under control with Smart income, is to buy a second or third passport for you and your family. There are many countries that offer citizenship by investment programs, and many that will give it either with a donation (often as low as $100K) or by buying real estate or investing in a business there. Different passports have different values based on where the passport will allow you to travel to. But if you have concerns about your freedoms, having the ability to strategically re-locate may be the best investment you could ever make. Not to mention being out of the reach of private law suits in the USA.
I would recommend you read the book “Nomad Capitalist” by Andrew Henderson on this topic, and watch his YouTube videos, etc. He has become one of the world’s leading authorities on this subject.
I’m hoping with this information that I’m laying out here, you can see that Debt is NOT a currency. And that Debt should be avoided at all costs. And that the opportunities for those that can generate their own cashflow needs, live frugally and debt free and then want to know what the next step is can see that the world is your oyster now, and going out into it is where you will find the future.
Stay safe and we’ll see you on the next episode.