Borrowing to Spend

Nothing, is a powerful disciplinarian. A floor to how low you can go. Saying “spend less than you earn” seems ridiculous without the dangerous helping hand of borrowing. If we can borrow, we can borrow to spend. Interest is the salary paid to money that is borrowed. Salaries are a commitment. The wage bill comes whether or not the customers turn up. The interest is due with no concern to what was done with the money. 

It is one thing to borrow money and put it to work productively. Where it creates more than the salary it is paid. There may even be a gap between when the money is earned and when the salary is paid... so the salary is an advance of expected/known/hoped-for (but distant) pay-back. 

It is a completely different thing if we borrow to spend. If we sink into a swamp of debt-financed consumption. Some have no choice. They pay ridiculous interest rates (because they are “high risk”) for short term emergency loans. Ironically, the lowest salary for money gets paid to those who have the most proof they do not need the support. 

Most lending is income-based. The obvious one is mortgages (3-4.5x salary) where you borrow a multiple of your formal income (the lender is trusting the employer’s commitment). Then people end up borrowing as much as they can to buy as big a house as they can. The demand goes up. The prices go up... not because of value creation, but because of the hot air.

Property Prices: An International Balloon Festival

Within Your Means

Spend less than you earn. Easier said than done. Unless you have outside sources of support, the only way to create space is to “live within your means”. The only way to build an outside source of support, is to live *aggressively* within your means. That completely changes your relationship with money. 

Money is not something you spend. It is not even something you save... for something. It is something you put to work. The real engine behind capitalism is not simply profit. It is reinvestment. Solving a problem for less than the demanded price, and putting the difference back to work. This snaps the connection between wealth and conspicuous consumption. Those living large are not putting their money to work. They are firing it. 

Conspicuous consumption is a stupidity tax. You do not build wealth by getting more stuff and bigger things. You build wealth by severing the connection between what you need and what you earn through hand-to-mouth income. Wealth is not what you spend. Wealth is your capacity to make your own decisions. To choose how to respond. 

What you spend conspicuously can be the opposite of building wealth if it is fed through debt. Then the interest payments gradually grow until your labour feeds someone else's consumption. Building wealth is not about how much you earn. 

Building wealth is about a sustainable gap between what you earn and what you spend. 

Pieter Brueghel

Escape Plan

Building wealth requires a plan. Before that, if you are trapped, you need an escape plan. If you are in a situation where you don’t have the ability to earn, or are stuck where you don’t own enough of what you earn. If what comes in is used to pay interest on previous consumption. 

Building only starts when there is forward momentum. Good debt is where money is borrowed, and given a productive job. The money is not borrowed and consumed, but earns a salary. The money gets paid. There is still risk. The borrower takes on the risk of not being able to pay the salary, because what is produced does not cover the costs. If you commit to salaries, you have to pay even when there is not money. Or close shop. The wage bill comes each month, and you have to meet it. Like if you have borrowed and consumed, and still have to pay interest. It becomes the cost of waking up. 

Building only happens with space. With construction rather than destruction. With a source of income. With control of expenses. If you then want to separate yourself from the anxiety of hand-to-mouth living, the escape plan can morph into a growth plan.

Resource Depletion and Consumption

The Unseen

My oldest brother is very dangerous over short distances. Like Gimli in the Lord of the Rings. My middle brother is more like Legolas, preferring long distances and floating seemingly effortlessly over obstacles surviving on leaf-wrapped Lembas bread. Thousands of years of thoughts hidden in a head we don’t have access to. People have different approaches to life, and we must be aware of that. 

Some knowledge is conspicuous and conscious. Some knowledge is embodied and relational. Our decisions are constructed by contrasts, what is present, and what is absent. What you see is not all there is. 

Debt is the best example of that. There is good debt and bad debt. If you don’t know the difference, you should probably avoid debt altogether. Bad debt is the opposite of capital. Once spent, it produces nothing but still needs to be fed. It takes on a life of its own and sucks on the life of those who are still living. You can pay back significantly more than initially borrowed as you start paying interest on interest. Strangled by debt traps. Even those living conspicuously “successful” lives may be digging deeper holes with each breath. 

The process of stilling the waves of money anxiety, through building a buffer, then building capital (an engine), often starts with dealing with the unseen.

Mini Me

You can think of capital as your Mini-Me. In a world that defines us by our earning ability, building capital is a path to telling those voices to get knotted. If you spend money, you are firing it. If you put it to work, you are feeding your Mini-Me. Gradually that Mini-Me can grow. If you reinvest (rather than consume) a combination of what you produce, and what your Mini-Me produces, one day your Mini-Me may earn enough to be your bread winner. So you can focus on ideas that are good ideas, but not good business ideas. You can only build capital if you are not servicing past consumption (debts), and you are earning more than you are spending. There cannot be growth while you are bleeding. There cannot be growth without breathing space. But if you can hold space for, and look after your Mini-Me, with time and care it can grow to hold space for you.

Becoming Accustomed

Pause before you look at people who are richer than you to learn about money. If you want to create a buffer for the noise. If you want space to breathe, then the best place to look is how you spend money. How could you live on half of what you spend? The best place to learn is from people who are living on half of what you are. The key to stilling the waves of money anxiety is the relationship between income and expenses. The ins and outs, and the balance between the two.

Someone who is earning a lot of money, but spending even more, will be progressively getting more into debt. Making it increasingly hard to reduce their expenses. Becoming accustomed to a lifestyle they can not afford. Even if their income is growing, they are not on the path to financial freedom. They are going to be stressed, and full of money anxiety. Whereas someone who is earning half of what you do, can offer you lessons on how to gradually build up a buffer.

The Dance of Ins and Outs

Who Pays?

I don’t like it when Governments lower interest rates to support weak economies. The interest rate is the price of money. The price of money is the salary paid to money for working. Money should cost something. When interest rates are lowered, borrowers benefit and lenders suffer. So Gran and Grampa who conservatively hire their money out to others, get paid less. Those buying second, and third, and fourth properties, pay the lower salary of the money they are borrowing to empire build. Still receiving the higher rent. Money is lent to those who can prove they don’t need it. Money is made by solving the problems of those with money. One way to strengthen the economy rather than transferring money from lenders to borrowers would be a Universal Basic Income. Get money to people who need it, and allow people to solve their problems. Interest rates are money’s salary. If you are wondering who pays when they are lowered, visit your Gran.

My Gran always gave me a Lemon Cream

Doing the Work

Think of money as a worker. Or yourself as the worker. Pick one. Bad debt is when you spend money you don’t have, and aren’t about to get. So you now have to work for someone to pay for something that doesn’t exist anymore. Slightly better is when you know money is coming, but you spend in advance. So as new workers arrive, you redirect them to someone else. Still, the workers never work for you. Leverage (borrowing lots) is when there is horrible work to do, but you can get lots of other people’s workers (easy borrowing) to work for you. And you hope it works out (i.e. Gambling). Good debt is when you have a good project, with acceptable risk, that creates something of value. You can pay a reasonable salary (interest) to workers, with some certainty, and build. Only borrow when you have a clear plan to create value and have the strength of endurance (Capital repayment) and flexibility of resilience (interest payment) to make that value creation sustainable. The first step to financial freedom is not having to borrow to spend. Finding space to breathe. Borrowing for consumption is the key difference between working for money, or money working for you.

"Bauer beim Umgraben" Van Gogh (1882)

Reality Check

There are four broad categories of investors in Asset Management Funds. Institutional, High-Net-Worth-Individuals (HNWI), Retail, and those who get left out because the economics are hard. Institutional investors are Pension Funds, Fund-of-Funds, Company Assets, Insurance Companies, Endowments (e.g. Universities), Charities and Governments. Investment Committees make the decision to invest on behalf of others. They pool the assets to reduce the costs. HNWI are rich people. They make their own decisions, or get an adviser. Retail Investors are non-professional but still have enough to invest that the expenses don’t completely swallow the growth. Not having money is expensive. Scale makes things cheaper. One of the hardest problems to crack is making investing accessible. Two companies I follow with interest working on this problem are Franc (www.franc.app) which aims to make investing affordable and social, and Meerkat (www.meerkat.co.za) which focuses on those who are in a hole of debt. Charting a path off debt reliance and providing cover for the clear and present emergencies that can make long term capital building a pleasant unicorn frolicking in another reality.

Look Up

Too many of our financial decisions are made based on a multiple, or percentage, of income from labour. Labour Income is a fragile, isolated, building material. The most obvious dangers are death and disability. The more sneaky ones are furlough (a new word for many in 2020) and redundancy. Double Income households hide the fact that unpaid work still needs doing. They also increase the amount lenders are willing to loan, without actually building houses. So the price goes up. Even sneakier is “longevity risk”, the danger of outliving your money once you can’t earn more because of old age. Add to that Financial Emergencies that get funded with debt, so that income ends up paying off past expenses rather than gradually creating wealth. We hide our addiction to hand-to-mouth living behind the shield of “Work Ethic”. The idea that if you don’t contribute, you shouldn’t earn. Fear as an incentive. More robust roots would see people as the best placed local authorities to solve problems. It would empower decision making of communities. It would invest in foundations and buffers independent of personal income generation. Solving the hand-to-mouth problem allows us to breathe, look up, and create. Sustainably.

Rotten Building Material

Survive

We know we have a debt problem. How it unravels without excessive pain is the million-dollar question. The less discussed question is the income obsession. The spending obsession. They are linked. You can mostly only borrow if you can prove you don’t need to borrow. Mortgages are a societal favourite drug. Income is the societal favourite syringe. We don’t have enough housing, so we push up the prices of the few houses we have (pressure cooker) and lend money to those who are playing the salary musical chairs game. Low interest rates. Long borrowing periods. Low deposits. In a world of feast and famine, the whole system is fragile if we don’t have buffers to support our required spending. To support the basics. Our foundation needs to be independent of our earning ability. Our buffers need to be independent of our productivity. People need to be people first, and productive assets second (if at all). You can’t just wave a wand for that to happen. Wealth is built consciously, over time, through a separation of who we are and what we do. We will have moved forward if the question “What do you do for a living” is permanently separated from survival. When we solve problems, rather than creating problems to survive.

Real Creativity

A fundamentally bad investment can still deliver good returns with leverage or subsidies. If the return is higher than the rate of borrowing, leverage magnifies it (in both directions). If money costs nothing (interest rates are zero), all an investment needs is a pulse and someone willing to give you their money for free. A subsidy means the investment is wanted for non-financial reasons (or the subsidy can eventually be removed). I don’t like investments like that. I also believe that Endurance and Resilience are fundamental. Endurance provides stability. Resilience provides liquidity. They can’t be directly focused on maximising sustainable growth. Some focus has to be given to strength in solid foundations and the flexibility to adapt. But the intention there is to release the potential of fundamentally good investments. Real creativity. Not to give precious soil and water to things we don’t really want to grow.

Larger Appearance, Same Reality

Start Again

Building an Engine (Capital) starts with finding an income. The raw material is the first person’s labour. Labour is like the Oil that started the Norway Sovereign Wealth Fund (now in a position to divest from Fossil Fuels). It starts with striking Oil. It's especially hard if you are a work taker with no work to take. Hard to develop the skills and knowledge required to kick start the process with no external assistance (Bank of Mom and Dad). Even then, the next obstacle is Emergencies. Even with Titan like self-discipline keeping outs (spending) less than ins, unavoidable bumps loom. Particularly if you are the first in a community to break free, and have obligations beyond yourself (Bank of Son or Daughter). Even when Governments legislate compulsory savings and investment (like Australia’s Superannuation Funds), the question of Emergency Access remains. What clear and present dangers are acceptable to etch-a-sketch all the Capital? To start again. What emergencies are worth borrowing against your future income stream, so that you end up endlessly working to pay off debt rather than building Capital? Forced back from the starting line. Finding an income is the hardest part, but even then, you may not be in a position to build an Engine yet.

Feeding the Beast

Debt is the dark underworld of Engines that empower financial freedom. The Stranger Things of the idea that money can work for you rather than you working for money. I think of money as a “Mini-Me”. If it is in cash, it is sleeping and waiting. Getting wrinkly and losing muscle mass (inflation). With almost zero interest rates, there is no incentive for others to pay you a reasonable amount for short term access to your Mini-Me. Bonds are when you loan your Mini-Me out. That is where “Good Debt” sits. If someone can put your Mini-Me to work, and pay you the salary. Equity (a share of a Business) is when your Mini-Me works for you. “Bad Debt” is a Stranger Things Mirror-Engine. When you borrow to spend or survive a big knock. When the interest rates are so high, it can quickly swallow the whole amount you initially got… and take on a life of its own. Demanding to be fed. Step 1 to financial security is getting an income. Unfortunately, for many… even that step may simply be to feed the beast.

Conspicuous

Conspicuous Consumption is spending money on luxuries in order to signal economic power. It is meant to provoke the envy of other people and raise social status. Often it is more a sign of someone who is “newly rich”, to signify a jump in the standard of living. Conspicuous Consumption is a form of stupidity tax. Paying excessively for something is firing the money. Money that is spent can’t work. Money that is spent can’t grow. Conspicuous Consumption can also be debt financed. The big house, fast car, flashy jewellery, and lavish feasts simply committing the person to having to do work to pay for that later. Ironically, someone earning R10,000 a month can be closer to financial freedom than someone earning $1,000,000 a month. Financial Freedom depends on the dance of the money coming in, and the money going out. What you see doesn’t tell the whole story. Time does.

Lifemaker

I regularly talk about building Engines. I believe Capital and Labour are lovers, not fighters. Capital can set Labour free. Not all good ideas are good business ideas. Monetising is a process of creating supply and demand constraints. A lot of good ideas thrive without constraints... and are terrible business ideas. But we need money. 

If you break the trap of living hand-to-mouth, and start to focus on building Capital (i.e. building yourself an Engine), a world of good ideas are released along with you. Your money effectively becomes your breadwinner so that you can be a lifemaker. That doesn't mean you can't make money, it just means you don't have to let money be the primary driver.

Why are you driving?

Debt can support Engine building. Good Debt is like an employee that makes the company more than the company pays them. A business also has to be very cautious of committing to employ too many people. It has to meet Payroll. Businesses use Debt well if they realise they can put other people's idle Capital to work, and make more than they need to pay. Without putting the whole business at risk if they can't pay the salaries.

Debt can, and more normally is, the opposite of an Engine. It isn't an employee that is put to work doing something productive. Bad Debt is usually consumed with nothing to show. Eventually you still owe interest (the Debt's Salary) even though nothing productive is being done. It is like having to pay someone a salary even though they aren't doing anything.

I don't believe in using debt to buy stuff that doesn't work for me. Save for things you want to buy. 

Warren Buffett always multiplies the price of anything he buys by ten. A can of coke doesn't cost $1, it 'costs' him $10. This is because every dollar he spends is being fired. Put to work, that dollar could grow. Eventually, that dollar could be receiving a salary of a dollar. Spend that.

Apply the same rule to money you don't have, the picture gets ugly. Fire a dollar that isn't yours, and if you don't keep up the interest payments, eventually you could be paying that dollar for nothing. Again. And Again. And Again.

Build an Engine. Avoid a Debt Trap like the plague.

Plague Flea

Build Custodianship

Debt is bad if you borrow it to spend. Unless it is just a timing issue. If I already know I am getting $100 in 6 months, then borrowing however much I can by offering to pay back that $100 is fine. It is not fine if you end up borrowing stuff you aren't going to get back. Then you get trapped paying continual interest. Debt is also okay if you can put the money to work in a way you are very confident it can earn more than the interest payments. If you don't understand the difference between Good Debt, and Bad Debt well ... then don't borrow.

A related concept is seeing money as capital, rather than what you can buy. So don't look at the $100 as a $100 jacket, or music concert, or groceries. See yourself as a custodian of that $100. Money isn't a thing. Money is a story. A useful story, is separating what you spend from the job you get your money. You decide whether to do the hiring (investing) or firing (spending). If your $100 gets a job that can make $5, then spend some of that $5, and hire some of that $5. Then the next year maybe you have $102.

In this way you can build up some basic financial security. You can build up an engine that pays a Basic Income. If a community did this, and saw their shared resources as something to look after, rather than to spend, they would be custodians. They could build a Community Wealth Fund that pays a Universal Basic Income.

A debt trap creates interest slaves. A Community Wealth Fund could be the catalyst for creative liberty.

Money is a story

Cost of Living

One objection to a Universal Basic Income is that it doesn't solve the problem of rent/housing being too expensive. Yes! It isn't a silver bullet. It doesn't solve everything. In the same way as making loans available to people to make housing affordable doesn't magically build more houses. I think of housing as something we buy rather than an investment (I know this flies in the face of how most people think of home ownership). Stuff we buy only gets cheaper if supply increases. If there isn't enough, it will always be too expensive for those with not very much. The choices of someone receiving a UBI will remain tough. Basic won't make life easy. Many other problems will remain, but a Universal Basic Income will at least empower everyone with a voice in solving some of their own problems themselves.

Build Houses if you want affordable houses

A Real Thing

If there was a mysterious flash, and suddenly there was no debt, and no money, all the actual physical stuff would still be here. The numbers are a way of counting, and a way of permitting activity. A coordination tool. If a group of people have no money, but they have skills, they can still help each other. This is why shadow economies work, but don't count. Gross Domestic Product (GDP) counts things you can count. So yes to paid childcare. No to stay at home parents. Yes to Zipcar. No to a friend giving you a lift. Money and Debt are trust tools. They help us do stuff without immediately getting compensated. They help us count things that can't really be counted by giving everything a price. Never forget that it is just a story to help us think. Money isn't a real thing.

Engine

The engine of Capitalism isn't profit. Profit can be competed away. The engine is reinvestment. Reinvestment is a sign that something is alive. Even if you are making no profit, but you can consistently make something well for exactly what it costs, and sell it, you will be able to create more and more. If you can then find someone to finance the growth, and consistency is the easiest way to do that, you can build a bigger engine. If you aren't making a profit, and you are doing something well - that is incredibly difficult to compete with. In a world with zero transaction costs and perfect transparency, if people can copy you, they will. If someone can see exactly what you are doing, but it is hard, you are pretty safe. Find something you love doing, do it well. Build something worth building. Reinvest.

Boulton and Watt Engine

(1788)

Steam gets the cycle started