The Borrow Smart Chronicles - The Big Debt Question

Episode 15

Author

Todd Ballenger
February 16, 2024

❝

Intelligent people know how to get what they want.
Wise people know what's worth wanting."

Shane Parrish

Weekly Spotlight: The Debt Question

We use debt for a variety of reasons. A borrower uses debt because they can’t pay cash, while an investor uses debt for financial opportunity. It seems that the majority of the debt we are seeing is based on the traditional definition of a borrower using debt because they can’t pay cash.

1. Mortgage Debt: +$112 billion to $12.25 trillion - mortgage debt is historically an investment, as it fixes the cost of living in a house (compared to rent which goes up with inflation) and the house appreciates which offsets that cost of housing to a net positive over any 30 year period in history.

2. Auto Loans: +$12 billion to $1.61 trillion - auto debt buys a depreciating asset that is critical for income, but isn’t typically an investment.

3. Student Loans: +$2 billion to $1.60 trillion - student loan debt is an investment in your well-being and has been shown to provide a higher income over time than those who don’t attend college, but the returns are compressing over time.

4. Credit Card Debt: +$50 billion to $1.13 trillion - is typically buying things you can’t afford to pay for with cash, it’s a bigger concern especially if it goes up faster than income is rising.

Our wealth is increasing, yet how much of that wealth is net wealth when offset by this rapid use of debt to fund income we don’t have? We are borrowing from our future selves. Ideally, you should borrow smart, and also repay smart.

wealth is rising but debt is rising - those experiencing the wealth increase are often not the same people experiencing the debt increases.

the largest debt is mortgage debt and about 85% of that in the US is fixed…

We are seeing the lower rate debt being replaced with higher rate debt as houses are sold and new houses are purchased.

a BORROW SMART CONCEPT
Patterns Repeat

I talk to consumers, friends, and coworkers, and the theme I keep seeing is the same mistakes made over and over again. Inherited patterns of acting and reacting financially in a variety of ways. These patterns are deeply engrained largely by what we saw modeled by our parents and what we read or had modeled for us as young adults.

It is incredibly difficult to identify a pattern, let alone break it. This video struck me as a great example of this difficulty.

There is another growing challenge - ‘Money Dysmorphia’. Dysmorphia is a mental illness involving obsessive focus on a perceived flaw in appearance. We see ourselves in others through their own money stories every day.

In an article by Erin Lowry, money is simply a ‘feeling of insecurity around their financial situation even when the true picture reveals little cause for concern.” With over 43% of Gen Z saying they have a flawed perception of their finances, how is this not a lack of education about money that is both skillset-based (how to manage their money) and mindset-based (how to think about their money) over time?

The patterns of today are being created via watching tic-tok videos and YouTube videos that make you feel like everyone is wealthier than you… you have to ask yourself questions that interrupt the pattern:

  • What does money mean to me?

  • What is my money story?

  • How will money be a partner in my life, not a problem I am always overcoming?

LIABILITIES
What’s Happening?

people are prepaying, but largely via the sale of their house, but remember most people are repaying extra, just ask them!

more repayments will come from refinances when rates move down

we are seeing more homeowner repayment stress - last time these all turned up was 2006 time period.

another view of mortgage deliquency rates

most of these owners are stronger, but it doesn’t take much with the leverage to see these foreclosure rates start to grow

this would increase foreclosure inventory

but rents are coming down

but still a higher percent of income

consumer are using points to lower cost

REAL ESTATE
What’s Happening?

sentiment improved over the last two weeks, in part due to Spring expectations and seasonality

sorry, this just looks bad

there is a big gap that needs to be closed one way or the other

investors are buying 1 in 4 houses for sale

but listings are still down

Your brain is like a supercomputer, and your self-talk is the program it will run.

— Jim Kwik

If you do not understand this quote from Jim Kwick, know that your personality becomes your personal reality.

ASSETS
What’s Happening?

how we view news and learn is shifting and our brains are being rewired

with it comes major shifts and new asset classes - like bitcoin

the government does not balance it’s budget

all that debt is also driving up asset values

and a lot of those assets are cash now earning 5%

the haves have more, the have nots are still struggling

this big rise in early retirement is from a big rise in stock market portfolios

and stonks go up over time

but we must be mindful of corrections that will also come

Everything is energy and that’s all there is to it. Match the frequency of the reality you want and you cannot help but get that reality. It can be no other way. This is not philosophy. This is physics.

— Albert Einstein

ON BEING HUMAN
What’s Worth Sharing?

“The hardest thing to teach a student—and the hardest thing to believe consistently—is that there is nothing ‘out there’ to go and get. There is no part, no career, no opportunity for which you should be searching and scrounging and coveting. All of the preparation is within, and you keep yourself mentally and physically fit; you remain generous with yourself and others; you stay deeply in study about your craft. Whatever is yours will then arrive.”​

Marian Seldes (hat tip Tim Ferriss)

DOPAMEMES
And Other Inspirations…

AIdeas
Future Hacks…

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