The community space we had before we launched Dozens, with 300 diverse customers from across the UK, whose advice helped to shape our brand and product, was called “What If”. This was a great way of starting interesting discussions.
I’ve recently started following some very interesting discussions on podcasts that also use this formulation, so I thought I might challenge your imaginations and ask a few “what if” questions here too, on Financial Wellness related ideas, to see what we imagine our future could be like.
What if you had no debts?
What if you woke up one morning and had still not won the lottery. You had no new money coming in, BUT everything you had owed the day before - on credit cards, mortgage, student loans, car loans, family loans, overdrafts ,… had all been wiped away and you currently owed nothing?
What would you do with your current income?
Can you imagine what you would change in your life, and what different decisions you might make, and why, if anything?
Please help us imagine what this debt-free future might look, feel, sound and taste like
I understand that, but my point was that, having seen the last vestiges of debt washed away, I would regret not having accrued more. Looking forward it would make little difference as a result of not entering the scenario servicing significant debt.
I would be pretty upset, because I don’t have any debts I’d wish I hadn’t bothered paying them off.
Seriously though, being 100% free of debt (bar my monthly credit card bill) has made my life really quite surprisingly more pleasurable. I tend to save, then spend, these days, and achieve financial goals that simply weren’t possible when a chunk of cash was going out every month to the bank in interest… Also just knowing that I could get by on a fraction of my income if I had to makes work choices sooo much easier.
I’ve got a donation strategy for the first time, which is actually fun. I could have spent time researching things I was interested in before, but I didn’t have the motivation without the cash. I decided to put a percentage of what I was spending on mortgage interest into charities and it’s now something I really engage with and think about.
The list goes on and on… If there’s any way you can step off the debt roundabout, even partially just do it. There will be rewards you haven’t even thought of
I love the idea of switching the mortgage value to charity donations and supporting the wider community. Can you tell us any more about your ‘strategy’?
I’ve found that debt worry has a double-impact - financial and mental. By removing the debt from the equation we not only have the freedom to spend on different things, but the mental space to think about where (and when) we want to spend it.
Of course, for those of us with mortgages, this fantasy is a wonderful situation. On the other hand, if you are renting, it makes a big difference - you still have to save for your deposit to even get started with that new debt. I wonder if anyone in that situation can share their thoughts on what would change?
I think you are right @robert that debt has a double impact. But equally, I don’t think people are given the right tools to deal with debt. I agree with Martin Lewis - lessons it should start at school age not left until you are in debt and are forced to reach out for help. People I know who have been in debt are basically told not to “worry” about it for the sake of their mental health but what they hear is “push it to the back of your mind and don’t address it”. Debt advisory services put standardised plans in place to get people out of existing debt, but have little success equipping them with the tools to avoid further problems. I have seen people go through several cycles of debt, getting worse every time. What has been missed for these people is an honest conversation about lifestyle and their long-term mental wellbeing. It really needs a multi-agency approach.
I think issues around debt are related to your question in another thread about the way UK people approach savings compared with many continental countries. Like my approach to savings, my mindset on debt is more “Northern European” than Anglo-Saxon. Debt has to be sustainable within the context of any individual’s lifestyle and I think many people struggle to evaluate and be truthful with themselves about the reason’s debt has gotten out of control for them. This is through no fault of their own - our society’s viewpoint on consumer debt, the huge incomes it makes for the financial intuitions and the way it fuels certain aspects of our economy needs to change.
By the way, I have experienced very significant personal debt in my lifetime caused by criminal activity. At that time, no help was available even though I co-operated with the bank and the police to convict the criminals. My attitude towards money now is very different to my pre-debt self! That was a very steep learning curve!
well, that’s certainly given us something to talk about
I am sure others will chip in with their experience, but there are two major separate things here as far as I can see:
getting new debt - this is a perfectly reasonable idea and behaviour.
If you could afford it before (bit of an assumption) then you can afford it still, but you can now borrow to create or invest in something that makes your future more secure.
If paying your mortgage had already been a stretch, it would be hard to repair a dodgy roof or to create a new office space at home for example, even if both ultimately added to the value. Or if you were paying previous student debt, getting more money to pay for a new course could be unaffordable.
borrowing to invest in the stock market is a very different and specific issue.
There is a big difference between borrowing to invest in buying or upgrading a property, or to “invest” in your education, and borrowing to invest in stocks and shares.
While all investments have risks, even property, the potential negative consequences of the second option are very high, and risk creating a very much worse debt situation if your investments fall in value and you still have to repay the debt.
I think you acknowledge this when you say “hopefully”
We do not offer investment advice, and you always need to make your own decisions or consult a qualified investment advisor if you need advice, but the mission of Dozens is to promote affordable investment and we would see a big difference between these two choices.
To get a mortgage or consumer loan to buy or improve a property, purchase any other consumer good (such as a car), or support education, a borrower would have to pass the strict suitability and affordability criteria set by the lenders and regulators.
Those checks are more relaxed for borrowing to invest in the stock market, because the stock brokers and regulators believe the investors who does this are experienced and should know what they are doing. However, that doesn’t mean you should borrow beyond your means.
In fact, if you follow the same criteria set for a mortgage or consumer loan for your investment borrowing, you will not expose yourself to any risk higher than an equivalent mortgage or consumer loans. You should be confidence that you can afford to repay the loan even your investment does not increase in value.
That’s only true if the borrowing is marked to market, such as a margin loan.
Let me quickly explain what is mark to market with two examples:
A mortgage is not marked to market. Because a borrower won’t be forced to repay (a part of) the loan or sell the property when their property’s value falls.
A margin loan is marked to market. Because if the investments’ value fall below a certain threshold, the borrower will be facing a margin call, and is forced to repay a part of the loan or sell the investments immediately.
Using a mark to market loan for a small to moderate amount of leverage (say, 10%) is pretty safe, because the risk of a diversified portfolio crashing more than half in value is extremely rare, and it’s virtually impossible to loss more than 2/3 of its value. The borrower will almost never be forced to repay the loan earlier than they initially planned. There’s also financial instruments, such as futures and options, to facilitate the borrowing without the immediate risk of a margin call when the market is down. They are more complex and requires more planning and discipline. There’s not mark to the market ways to borrow to invest, such as 0% credit cards and cheap consumer loans. They are not exposed to the market risk at all, which will provide the investor/borrower a peace of mind.
The reason to borrow to invest is because a diversified portfolio will produce a positive return in the long run (10+ years) with certainty. The risk of investment falling in value only exists in a shorter time frame (usually <5 years). In the low interest environment we are in right now, the cost of borrowing is very low (0% credit card, 1.x% mortgage, less than 3% loans), and there’s a very good chance for a diversified portfolio to deliver a return that beats the inflation plus the borrowing cost, as long as you are not forced to sell early.
A real life example of borrowing to invest is mortgage, which most of us will happily accept, because we “know” (predict) the house price will go up. Borrowing to invest in the stock market (a broad term, which also includes many other things, such as bonds, gold, even bitcoins) is really not so different if you “know” the value will be a lot higher by the time you want to sell.
Disclaimer: the content in the post is for discussion only, and it does not contain investment advise. You should seek advise from qualified professionals before attempting to invest any borrowed money.
I think the problem per se, as previous posters have raised, is that debt is not automatically a bad thing. Sure, having to borrow money at horrendous rates just to survive is obviously not a good thing, but there are plenty of ways out there to use borrowing as a productive tool. In a way, I’m debt free (as only borrowing through an investment company), so the what if wouldn’t affect me. But I really think language should move on and create more terms (though of course they already exist, but people tend to default to debt) to distinguish between the bone-crushing burdens, and the tools in an arsenal.
I do understand that there is such a thing as a ‘good’ debt … and we can maybe agree to differ for now on the risk associated with using this for investing.
But, this is all rather practical and technical.
I have to admit that when I posted this, I was hoping to share some positive, motivating stories about life-after-debt. Stories that reminded some of those who are currently suffering with high debt repayments (which I understand is not many in this discussion so far) about what they may be aiming for, and what awaits after making that effort.
If you already feel you have no stressful debts, is there something that you remember changed when you reached this stage, even if it was a while ago?
I can (almost) remember the first time I felt I had enough spending money to go from buying the occasional bottle of wine with my shopping, to buying a whole case of a wine to enjoy over the long term. Just buying that full case was a bit of a milestone
I am a little late to this discussion but through running my own company for the last 10 years I am less than 3 months away from being debt free which will essentially make two thirds of my income disposable.
My main concern is falling back into the debt trap again and I’ve had to mentally condition myself about how I spend money. Currently I save up the money to buy something and then pay for it on a credit card. The upside of this is that I maintain my credit rating but only pay for things I can afford.
The main thing for me has been figuring out where to keep my money. All of my remaining debt is interest free so I’ve been putting money into savings using various accounts just to keep it away from my main balance. Why would I do this when I have debt? Basically I am earning more on the savings than I am paying in interest on the debt.
I am very reluctant to try my hand at crypto currency investing so am saving for a mortgage and put as much as I can into my pension.
The save-to-spend behaviour you describe is really very sensible and should, in theory, really be the default unless there really is an urgency to buy something that justifies the cost (and risk) of credit.
Offsetting this is the benefit of a good credit rating for making necessary purchases such as property, so your solution of reasonable. (credit ratings being more like a test of the skill to navigate the world of credit rather than whether you have money)
It’s going well actually. I have found that on the rare occassions I “misbudget” that I have collected enough things over the years to make a quick sale on FaceBook Market place. I had one occasion where I had to remove funds from the deposit savings and it was do disheartening.
Completely agree. After thinking about this I concluded (assuming current mortgage all paid off) I would want to buy a bigger house, but keep the mortgage small so I also had more disposable income. The debt wouldn’t particularly weigh on me because I’d be fortunate enough to have a good chunk of equity should I be forced through circumstances to downsize again…
Very reasonable behaviour indeed if you are not currently overburdened by that payment. While a mortgage is helping you to build your future assets, it can also be a struggle, so not everyone would necessarily be able/willing to get back on that treadmill.
well, that is sort of the point of saving and investing, … in order to have the funds to pay off your bills and pay for things you really want … but I can’t promise the “wake up tomorrow morning” bit of the scenario
It has been around for some time, and the name of it is lottery. You will get a (nearly zero) chance to pay off all your debt and have some more left for you to spare, if you could afford the very small cost of the product