Debt Buys the Future
Debt lets you use tomorrow’s money today.
That can be sensible. Education raises income. Equipment starts turning a profit. Housing gives stability. A short-term loan covers a cash gap.
At the same time debt reduces future freedom whether or not the purchase paid off.
The payment has to be made after a redundancy, an illness, a divorce or a change of interests. The bank is under no obligation to share your disappointment in an earlier version of your life.
So debt calls for a check:
- what is being acquired;
- whether it creates income or only expense;
- how sustainable the payment is;
- whether there is a reserve;
- what happens if income falls;
- whether the asset can be sold;
- what the full cost of interest and fees is;
- what alternatives exist.
A blanket ban on borrowing is too simple.
A mortgage can be worse than renting, if you overpay, lose mobility and buy unsuitable housing out of fear of “not having a place of your own”. It can be better, if the payments are sustainable, the horizon is long, the housing suits you and ownership genuinely matters for your security.
The comparison to make is not rent against a mortgage payment but complete options:
- interest;
- taxes;
- repairs;
- insurance;
- a rise or fall in value;
- the cost of capital;
- mobility;
- the risk of eviction;
- the value of stability.
“A place of your own” carries an emotion. The emotion does not make the decision irrational. Stability, the ability to remodel the space and independence from a landlord are functions too.
It is unwise to buy a house merely because an adult is supposedly obliged to own property. It is equally unwise to treat renting as the highest form of freedom for someone who can be asked to move out in two months.
Debt is not evil. It is a contract with future income. Sign it remembering that the future person may have other plans.
The asymmetry in such a contract is always the same: the payment is fixed and the income is not. A salary may grow, or it may disappear along with the department; the terms of the loan are not renegotiated at that moment. So sustainability is tested not against current income but against the worst income you consider possible: what is left if only one of the two of you is working, if the job search takes three months, if medical treatment is added. If in that scenario the payment can only be covered by selling the very thing you bought, there is no margin.
Which leads to something uncomfortable: debt feels comfortable exactly during the period when it is taken on, because it is taken on at the best moment of a life. The assessment is made by a person at his peak, and the payments will be made by the same person on an average day and sometimes on his worst.