Debt Philosophy

Good Debt, Bad Debt: Knowing the Difference Can Save Your Financial Life
by Jon Hanson

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Mr. Jim Rohn asks a great question of his audiences: "If we took your philosophy of life, and got it all down on paper, would you be excited about traveling all over the world giving talks on it?" If not, he suggests, you start there - reworking your philosophy. I labored over Mr. Rohn's challenge for months. In fact, it was the driving force behind completing this book. I ultimately wanted a book I could hand to my children and say, "Here are my core financial beliefs - they are as fundamental and as sure as gravity."

Many financial books present supplemental, not fundamental, principles. Financial failure begins in the thinking process before the actual spending. George Orwell said, "People can't write clearly because they can't think clearly." I try to avoid tortured logic and incomprehensible phrases that are the result of a confused mind. I'd expand this to finances too. Confused thinking causes confused spending.

After my IRS debacle, as discussed in the Preface, I realized that my primary downfall in the area of finances had been lack of discipline. While I had done pretty well overall, I felt I could have done much better. Here are three traits of my philosophy that apply to finances. To the right of them, you see the parallel yet antithetical traits advertisers and the merchants of debt want you to embrace:

Econowise Traits:

1. Discipline
2. Deferral
3. Discernment
Result: Lasting joy

consumerati traits:
1. Indifference
2. Immediacy
3. Ignorance
Result: Temporary happiness

Most men and women do not make their daily decisions based on a calm weighing of risks and benefits.

Consumerati versus Econowise

The Consumerati are what I call those who are spendthrifts, living hand to mouth and in general never thinking of tomorrow. Consumerati are proficient at consuming at any cost. For the most part, they are well-meaning people whose ambitions far exceed their obedience to the fundamentals of money. They respond to emotional marketing appeals and, once they run out of cash, it seems only natural to use bad debt or consumer debt to pay for their wants. We all have a little Consumerati in us. According to Cardweb.com, 50 percent of Americans pay the minimum or far less than the balance due on their credit card bill. Twenty-nine percent pay off their cards monthly. Twenty-one percent of all households in America do not have credit cards. The Consumerati are likely to confuse income with wealth. They don't understand an age-old fact that spending, and not income, determines wealth. Income is like a moving river - wealth is like a lake or reservoir. See the beginning of Chapter 3 for more on this.

The Econowise, on the other hand, think about how today's actions will affect their future. If we merge economy and wisdom together, we come up with the Econowise - people seeking both economy and wisdom. The Econowise plan on paper and understand how burn rate, delayed gratification (Chapter 4), and avoiding the debt effects (Chapter 1) all can work together to create a prudent lifestyle. The sooner you eliminate the waste, lower your burn rate, and begin an Econowise program, the better.

The definition of burn rate is all the money spent that does not increase your wealth. Burn rate is what is consumed and gone forever. Taxes are a major part of your burn rate, together with food, shelter, and transportation.

Give Me the Best

The last five chapters of this book are more about doing than just philosophy building. Money Magazine writes that recent studies by economists from New York University have found that a willingness to plan is closely linked to wealth accumulation. Before you dismiss this statement as self-evident pabulum, ask a few acquaintances how to become wealthy. Many will answer, "a large income and an inheritance." A large income is not necessarily a guarantee of wealth. Nor is an inheritance a guarantee of wealth. It can soon be frittered away. On the other hand, income of almost any size when strained through well-trained habits can create wealth.

Both Plans Are Scalable

The planning and saving habits of the Econowise scale to make them wealthy as their income increases over the years. The nonplanning and debt abuse habits of the Consumerati likewise scale to make them poorer and deeper in debt as their income increases. In other words, with a Consumerati lifestyle, if you are unhappy with your life while earning $40,000 a year, you will despise it at $110,000 a year.

Life is truly asynchronous. What you do today may not have an immediate effect but may have a very large effect later in life. The whole personal finance field is pretty simple, a near mathematical certainty - until you add in one thing: human emotion. Most men and women do not make their daily decisions based on a calm weighing of risks and benefits. Most are emotional beings who respond to vague if not nonsensical messages such as "You deserve the best." Hold on! Isn't "the best" a plan that will provide you and your family with a lifestyle you've not only dreamed about, but planned for and earned? Don't seek someone else's best - seek a plan you have designed for your life, a plan that is best for you.

It's One Thing to Admit Your Stupidity -
It's Another to Escape the Consequences

This is not an offering from the Self-Esteem Is Free Institute. Good Debt, Bad Debt is aimed at two distinct groups: those who realize that they are groping in the dark, financially speaking, and those who are doing OK but think they could do a little better. I call the blind gropers the Consumerati. They enable Madison Avenue and the merchants of debt to enjoy record earnings year after year in post-responsibility America.

To Consumerati, delayed gratification is an alien concept. Despite being part of the richest and most educated group in American history, Consumerati suffer deeply from the seeming inability to get a grip on the financial rudder. The Consumerati are, for the most part, slaves to their emotions. They are sure that they must follow their feelings to get what they deserve. The world around them seems to confirm this - they deserve the best, don't they? Consumerati men and women strive to maintain or create an image that is neither healthy nor fiscally responsible. Relax. Good Debt, Bad Debt will concentrate on what you can do using your present income.

Personal finance is simple, requiring little more than basic math and sincere forethought. We only need add human nature to finance to make it both funny and tragic.

Copyright © 2004 Jon Hanson. All rights reserved. This excerpt, or any parts thereof, may not be reproduced without permission.

About the Author

Jon Hanson lectures to audiences of all sizes on personal finance topics. A twenty-four-year veteran of the real estate business, he is now a full-time writer and public speaker.