Blumer & Associates, CPAs, PC - Certified Public Accountants

I listened to a podcast recently on the debt of various countries, and how its growing.  Those countries with significant consumer debt as compared to their GDP (or the measure of their country’s output) are falling or hurting very severely.  The US isn’t as bad as some of the worst countries, but our debt is growing at a pretty rapid pace.

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The podcast mentioned two reasons consumers and companies incur debt:

1.  If their desired spending exceeds their desired income. Stupid.  Listen to some Dave Ramsey rants to figure out you need to lower your “desired spending” below your current income.

2.  If they believe they can use the borrowed money to invest in a higher future return. This was a practice started in the 70s (according to the podcast), and typically worked out well.  Taking on debt now, and investing it in a good business idea returned a pretty good return as your business grew.

But that was then…

1.  Debt is NOT as good an investment as it used to be.  I don’t believe #2 above is true anymore.  Our economy changed a couple of years ago (if you didn’t notice), and I don’t believe we are going to be what we were before the downturn.  Though our economy has shown some signs of a rebound, I believe they are subsidized signs by our government pumping money into people buying new homes and hiring new workers.  It’s not real yet.  And I believe it’s going to take some time to truly rebound.  So I definitely would NOT invest in debt now and expect a good return within 5 years.  It’s not a safe bet.

2.  Pay off your debt.  If you have to grow slower, then do it to pay off your debt.  In 5 years you will be the wiser consumer if you make changes now to solidify your cash position.  And if there is going to be another downturn in the future (and there almost certainly will be) then you will be in a cash position to benefit from everyone else that is leveraged to the hilt.  I have some debt too and I have given the next 5 years to get this paid off to be more agile and stronger in the future.  I know that investment (i.e., paying off debt) is the best investment I can make now.