Written back in 2014 in the middle of the Bull Market. The influencers of the time pushed growing debt to build wealth. Debt is constant. Wealth is ephemeral.
I have had a few folks take exception to my statements in Questions with an Answer: Get Out of Debt. They question whether it is more critical to incur some debt to build wealth than worry about growing debt. If I could figure out how you type a Bronx cheer, I would, but I will simply say bunk!
My response was simply, I would rather owe nothing. Savings of all kind can drop in value very quickly (depending on howÂ it is being held). Debt will never magically decrease in value (and severity) without you doing something about it.
You may own a house worth $400,000 right now, and you have a mortgage for $125,000. However, it is possible that the house could (in a very short period) be worth less than what you owe on it, then where are you? I have rarely heard the opposite where suddenly your mortgage was forgiven. If it did, there would be dancing in the streets.
Wealth is ephemeral. If I own $1,000,000 worth of BCM Enterprises Stocks (as options, which don’t vest for another 6 months) and I owe $160,000 on my mortgage,Â my Net Worth is?
Stock options are worthless until you see the money from the transaction in your bank account. I had over 10,000 shares of Nortel in options. One day they were finally worth $300, and then they were worth nothing again (as an obtuse example).
If I own a $1.5 Million home in a lovely section of the Beaches in Toronto, and I owe $400,000 on the mortgage, how much am I worth?
Correct Again! Value is in the eye of the purchaser. The beautiful cottage in the Beaches may sell for more than $1.5M, depending on the market.
One more: I have a Pension that is going to pay me 60% of my salary when I retire. I have $200,000 in my RRSP, but I still owe $95,000 on my home, and I have $10,000 worth of other debt (bad gambling debts, let’s say), what is my Net Worth now?
Some might say: $95,000 at least because you have all that lovely RRSP money and that juicy pension, but do I?
When I cash in my RRSP, taxes will need to be paid. My Net worth would be closer to $0, and then you can figure out what you can evaluate your pension however you like (but remember you have to live long enough to enjoy that as well).
All of this is to say, that Wealth is Ephemeral. Wealth can disappear like a Fart in the Wind, but DEBT is like an abscessing tooth. Until you remove it, it will hurt, and it will not go away until you do something about it!