I have been attempting to raise my visibility on social media, lately. I have been commenting on Instagram and Twitter and it seems I have ruffled a few feathers. Evidently paying off debt is risky ?

Let me be clear, the risk is losing possible growth through investing. To be specific, the argument made was:

“…disagree. This is why so many people are cash poor, they race to pay off debts costing them 3% with cash making 7-8%…”

Instagram rebuke of my comment about paying off debt (Instagram has financial advice?)

Firstly 3% debt rate is only for Mortgages (or secured credit). Most unsecured debt is much closer to 3 to 18% more than many advisers would have you think about. The “cash poor” phrase made me bristle too. Remember how no one talks about house poor any more.

Borrowing money to invest in the market always worries me. Leverage has the potential to make a lot of money, but it can also do the opposite. I wouldn’t do it, but I only buy Index Funds and similar ETFs.

A Scenario of What Can Go Wrong

I know a former exec at a large tech firm. He had many “options to buy” the firms stack at a lower price. He decided to exercise the options on the stock and hold the stock. Normally the option is exercised and then a quick sell order is put in place, to take profits from the sale.

This gentleman decided, he would be more clever, and hold the stock, to live off the dividends from it. At the time, the stock dividend yield was about 1%, which would be plenty to live on. Money was borrowed to make the transaction, as it was for a large amount of stock.

Less than two years later, the dividends were reduced to zero. A short period afterwards, the stock was worthless. This was yet another firm that was “too big to fail”.

Is this a “corner case”, yes I think it is. It is also an excellent example of someone assuming, “the good days are here to stay”.

Removal of Debt, Addition of Options

If you pay off debt, you have more options. Do not fall for the FOMO (fear of missing out) arguments. If you have little or no debt, you then have options to do whatever you like, with your money.

Social Media and Financial Advice

Some frowned at financial talk on web sites. Then there was Twitter and Facebook that got in on it, but now Instagram and TikTok? Seriously, unless it is the Wizard of Omaha on TikTok, maybe get your financial advice elsewhere? Need I point at the Gamestop Reddit debacle to suggest maybe you should be careful where you get your advice?

A Very True Statement

“Think of borrowing money today as negotiating a pay cut with your future self”

Preet Banerjee

“Never was so much owed by so many to so few“, –Winston Churchill

True Heroes

I paraphrase Churchill as a precursor to the latest data from Stats Canada about the National Balance Sheet. Remembrance Day is not far off, but allow me to borrow from Mr. Churchill a bit more.

Unfortunately, the phrase is very much in context. The so few, is the banks, unfortunately.

Stats Canada published their latest update of the National balance sheet and financial flow accounts, second quarter 2018, and as usual there are some very interesting numbers in this report.

It starts off saying that we are wealthier (but you need to read carefully what that means), but then we find out about our debt loads.

So Much Owed?

The report states:

Credit market debt as a proportion of household disposable income (adjusted to exclude pension entitlements) increased to 169.1%, as credit market debt outpaced income. In other words, there was $1.69 in credit market debt for every dollar of household disposable income.

Let us not frolic with glee, while the increase is slowing, it is still increasing (i.e. we are borrowing more compared to our disposable income).

For every $1 of disposable income you owed $1.69 ? That seems quite worrisome, because eventually, someone will ask for their money. Loans are callable, especially HELOC’s, Credit Card Debt and Loans.

We are worth more, but so much of that net worth is tied up in Real Estate. If the housing market goes bust, this could lead to disastrous consequences. So much more will be owed by all of us then.

A friend of this web site is Doug Hoyes (CA, CPA) and he gave me a copy of his book Straight Talk on Your Money to review. As most folks who have given me their books know, I am atrocious at reading and following up on books, however, Mr. Hoyes had an ace in the hole, he has published an Audiobook. I subscribe to Audible, so I used one of my credits to purchase the book and was pleasantly surprised.

Mr. Hoyes’ presence and narration of the book is excellent. Many times authors fool themselves into thinking that only they can bring their story to life, but Mr. Hoyes’ experience with his podcast has served him well.

This is a book for anyone wanting to learn about how your financial plans can go awry. The stories told are of ordinary folks, who had some very bad luck, or things just got out of control. If you think you have everything under control, read the book you will feel less confident and see where your plan might need tweaking.

If you think you have your life insurance story in place, please read the There is More to Death than Life Insurance section. I did like the section about Never Loan Money to Family or Friends as well. I won’t ruin it for you, but it really does make sense to me.

The book is an excellent read and the audio book is really great to listen to while commuting or on long car trips too. Mr. Hoyes’ delivery on the audiobook is top rate (and his son engineered the book as well, and the sound balance was very good). This is not a classic How To financial book but it gives concrete examples about how life is variable and things can go wrong.

Straight Talk on Your Money is an excellent financial read.

Open Disclosure

I do like Mr. Hoyes, I have only met him a few times, however we have spoken many times on-line, and I have been a guest on his podcast twice. Mr. Hoyes  is a bankruptcy trustee (and an accountant), and he seems to genuinely care about his customers as well. Mr. Hoyes did give me a copy of his book, however, I bought the audiobook version myself. I am not receiving any payment for this review. If you click on the Amazon link I will make a small commission. Please keep this in mind reading my review.

Serial refinancers is a term I heard Scott Terrio use on the Debt Free in 30 podcast, and it really resonated with me.

Much like serial murderers, serial refinancers just keep going back to the well and refinancing their debts with consolidation loans or similar debt vehicles. Much like serial murder (or murder in general) this is very bad! Consolidation or refinancing of a debt is supposed to be something you do once (if ever), not every 2 years.

A good point that Mr. Terrio makes is that with the new credit rules in place, you are more likely to get turned down for a consolidation loan. Yes, credit is still loose, but the rules are tightening things up. Mr. Hoyes and Mr. Terrio are not seeing more folks coming into their offices with these problems, but it is still early. The new financing rules only came into play at the start of the year.

What will happen when this tighter credit takes hold? More folks going to Payday loan and alternate finance firms, most likely, which will simply accelerate the process of insolvency, or the personal finance death-spiral of serial refinancing.

Refinancing is Bad?

Yes, refinancing debt is bad in business and it is bad in your financial life as well. If you are carrying a huge credit card debt, refinancing looks like a life-line. It may be a life-line but if you are not going to delete those credit cards from your financial life, you are setting yourself up to fail.

I know serial refinancers, I have tried to point out the folly of their ways. I have not succeeded in most cases, but I can see the path (i.e. financial death spiral) they will follow, so I am keeping my favorite bankruptcy trustee’s number around in case.