Here’s a simple MBA lesson: borrow money to buy things that go up in value.
Borrow money if it improves your productivity and makes you more money.
Leverage multiplies the power of your business because with leverage, every rand you make in profit is multiplied.
That’s very different from the consumer version of this lesson: borrow money to buy things that go down in value. This is wrongheaded, short-term and irrational.
A few decades ago, mass marketers had a problem: Consumers had bought all they could buy. It was hard to grow because dispensable income was spoken for. The only way to grow was to steal market share, and that’s difficult. Enter consumer debt.
Why fight for a bigger piece of pie when you can make the whole pie bigger, the marketers think: introduce consumer debt and make the pie bigger. Swipe it, Charge it, they say. Put it on your card. Pay now, why not, it’s like it’s free, because you don’t have to repay it until later. Why buy a Honda for cash when you can buy a Mercedes with credit?
One argument is income shifting: you are going to make a lot of money later, so borrow now so you can have a nicer car, etc. Then, when money is worth less to you, you can pay it back. This idea is actually reasonably new, fifty years or so and it’s not borne out by what actually happens.
Debt creates stress, stress creates behaviors that don’t lead to happiness.
The other argument is that it’s been around so long, it’s like a trusted friend. Debt seems like fun for a long time, until it’s not. And everyone does it. We have been sold very hard on: buy now = happiness, and consumer debt is the engine that permits this. Until it doesn’t.
The thing is, debt has become a marketed product in and of itself. It’s not a free service or a convenience, it’s a massive industry. And that industry works with all the other players in the system to grow, because (at least for now) when they grow, other marketers benefit as well.
Unlike in most African states who are on a cash basis, South Africa is a credit nation. The system forces you to have debt. Having no debt limits you to a number of things. The system is interwoven that the all institutions offering credit belong to two or three credit rating organisations.
As soon as you get into serious consumer debt, you work for them, not for you.
It’s simple: when the value of what you want (however you measure it) is less than the cost of the debt, don’t buy it.