By now everyone knows the story about Greece and what it had to go through to stave off bankruptcy. It was never like this, nor did it ever have to get to this point, but the truth remains and still remains that the country had borrowed more than it could repay.
People talk about good debt and bad debt. No doubt no one could blame Greece for borrowing money to keep up with their social welfare payments, pension payments to the retired and keeping government workers employed with a decent salary. It wasn’t like the government was borrowing money to put on a fancy fireworks show, or put on a public spectacle for amateur sports. This was good debt. Right?
Regardless if it was good debt or bad debt, debt needs to be repaid. That’s why there really isn’t such a thing as good debt, especially when we use debt to purchase things that don’t give anything in return. Some would argue that personal debt is good if it’s used to buy a house or if it’s used to buy a good education, but debt will only put you in a bind.
It’s Not An Asset
I’m not sure what kind of accounting is being taught in school, but debt is not an asset. Debt hangs over you like a shadow and slowly brings your financial situation into the dark side. Those that actually believe that debt can be converted over to assets have to be lying to themselves. You cannot take something that is a liability and suddenly turn it into an asset.
The fact remains that the debt still needs to be repaid. Regardless if a house is purchased, or equities, or bonds or any other investment instrument. The debt remains a personal liability that needs to be repaid.
Restricting Cash Flow
A large part of the fact that Greece couldn’t pay their bills wasn’t because their government wasn’t generating tax revenue. According to the OECD, Greece collected over $65B in tax revenues for the fiscal year in 2014. The issue that Greece faced was that it borrowed too much money and didn’t have the means to pay it off at regular intervals.
This meant that a lot of their revenues had to go back to paying back debt or interest from the debt. This had a severe detriment to yearly cash flow. When so much money went back to paying off interest and principal on debt that made the treasury run dry. The only solution is one of two things. Cut back on spending or declare bankruptcy.
The Greek government is learning the hard way how debt can have a devastating effect on cash flow. Citizens now have to endure even further austerity measures that will further crimp their standard of living. Similar to our own personal finances, when we accumulate too much debt, we end up servicing our debt rather than using our paycheques to increase our own quality of life, or to invest in assets that actually generate a positive cash flow.
When our own personal cash flows reach a point where we are constantly paying interest or debt, the only way out is either to cut back on our personal spending or declare bankruptcy. There is no one out there that is going to bail us out like the government. We as individuals cannot print additional currency like federal banks. We’re ultimately responsible for our own actions.
In general most people use debt to get ahead in one way or another. Whether it’s to help us purchase a home, pay for our education, or get us our first car so we can get to work, we use debt as a way to get ahead quicker rather than having to wait and save.
The real question we should really ask ourselves is whether taking on large amounts of debt is actually necessary. Does an expensive education actually lead to a better job? Is it really necessary to buy a larger house than you need? Is a new car necessary?
Sometimes it might be better to avoid debt completely. Perhaps attend a public educational institution to reduce costs, or maybe it’s better to rent rather than buy a house. In some instances, public transportation might be the more convenient way to get to work. Some of these lifestyle decisions can ultimately keep us away from debt.
Taking on debt is really a choice rather than a necessity. We take debt to quickly get ahead, but we don’t consider the consequences. It’s fun while it lasts, until it doesn’t.