Yes, there are two paths you can go by, but in the long run…
Whether you’re cogniscient of it or not, there’s another view of debt compared to the traditional view.
On one side you have traditional financial advisers; Your auntie and uncle who are now well off, perhaps your parents also: They would all suggest that the best strategy with debt is get rid of it as fast as you or ideally avoid it altogether. You see they come from a paradigm where this was actually possible. In their world, the average mortgage could have been around 3 times their annual salary – they would have worked their butts off to get it gone, then they would have turned their attention to building a retirement plan. They may have even received an inheritance or some other injection of capital along the way that meant they were never really in a position to have to borrow.
Enter today’s generation: A couple on good income, with not much in the way of assets, just starting out in the property market may pay about 7 times their annual income to purchase their first home– is debt good for them? In many cases they’ll borrow to do renovations and maybe even borrow again to purchase a bach or a rental property. Sure, values of property increase over time but there’s no way they’ll be able to pay down their debt from their after tax earnings. It’s not unusual for me to have clients, on modest incomes, with debt levels well in excess of $2m these days. It’s crazy I concur, but this strategy of not being afraid of debt, has assisted in the growth of equity of many a first home buyer.
Who’s right?
It’s easy to be critical of any paradigm that hasn’t worked for you– If you’re anti-guns, but the intruder who’s broken into your home at 2am isn’t, would you change your paradigm then!? If you have no other avenue to build your assets and provide for your family, of course debt is good!
What happens with many borrowers however is that they try to hold the two opposing debt views at the same time…You cannot focus on two things at the exact same time however. Try thinking about an apple and an orange simultaneously. You may be able to switch between the two extremely fast, but you cannot do this at exactly the same time continuously.
It’s a form of cognitive dissonance – you cannot have two thoughts that are at odds with each other, and if you try, your behavior will be contradictory. Many people who take on mortgage debt, try on one hand to get rid of it as fast as they can, whilst increasing their borrowing on the other hand just as fast.
One could say ‘young people these days’ – if it glitters, they can have it, even if the stores are all closed they can purchase it. Makes me wonder though – does the older generation simply believe what they do because it worked for them and no other reason? Are they really that arrogant to think their own experience is the benchmark? On the other hand, do they hold a ‘forgotten perspective’ that we should take head of? Which force is stronger – Faith or fear?
So let’s look at the facts – right now if you want to own a home in a good city, you will likely never pay off the debt from your income. Those who purchase property right now are either unaware of this, or they don’t care. Don’t like the rules – then don’t play the game.
Yes, there are two paths you can go down, but in the long run, the buck stops with you. Do you subscribe to your parents financial worldview only to find that in the end sure, it worked in the ’70’s but not anymore. Or rather, do you borrow up to your limit to acquire as much as you can today, in the blind faith that what has happened in recent history will persist?
